Category: CREDIT SCORING

10-Minute Pocket Guide to Build Credit: A Free Report

Posted on August 12, 2021 by - CREDIT SCORING

Want a crash-course in how to build credit? Then review this “10-Minute Pocket Guide” every six months or so. I know it’s not really small enough to fit in your pocket … I call it a pocket guide because it’s short. In 10 minutes or less, you can be reminded how to build a 720 credit score.

Step 1: Keep your credit card balances under 30 percent of your credit limit.
To increase or maintain your credit score, your balance on any one credit card should be no more than 30 percent of your limit. For instance, if you have a $10,000 spending limit on your Visa card, keep your balance at no more than $3,000, 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 funds among your credit cards so that each card has a 30 percent balance or less; and/or
2.     Pay off any debts that put your balance above 30 percent of the limit; and/or
3.     Ask your credit card company to increase your limit so that your balance is less than 30 percent; and/or
4.     Open another credit card account and transfer balances accordingly (but only after reading STEP 2).

Step 2: Have at least three revolving credit lines.
Credit bureaus give higher scores to people with at least three revolving credit card accounts, which include major credit cards such as Visa, MasterCard, American Express, and Discover. If you do not have at least three active credit cards, you should open some.
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.

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 it.

Step 3: Verify the accuracy of your reported credit limits.
Credit card companies often fail to report your credit limit, or they report a lower limit than you have. This causes your utilization rate to be reported as higher than it actually is, which degrades your credit score.
Why do credit card companies fail to report correct credit limits? They do not want to lose their client base. If other companies see that you have a high limit and a positive credit score, they might solicit your business. By failing to report the correct credit limit, credit card companies keep your name off mailing lists and better retain your business.

If your credit limit is not listed on your credit report, or if it is inaccurate, contact your credit card company and ask it to correct the mistake. Follow up with the credit card company by sending a letter. If you are still having problems getting the proper limit reported, contact the credit bureaus directly, send copies of your statements, and ask that they make the proper corrections.

Step 4: Have at least one helpful active or paid installment loan on your credit report.
Having a healthy mix of credit is a great way to increase your credit score. Therefore, to maximize your credit score you should have at least one installment loan, a mortgage, and three major revolving credit cards (Visa, MasterCard, American Express, or Discover). Typically, an installment loan is used to purchase a car, but it also can be used to purchase a computer, furniture, or major household appliances.
Make your installment payments on time. As helpful as an installment loan can be to your credit rating, it can be equally harmful if not paid on time.

Beware of harmful installment loans—those that delay payment on an item for more than 30 days. This type of credit will always hurt and never help your credit score.

Step 5: Remove high-priority errors from your credit report.
An error can be as simple as having the wrong address or name listed on an account. It can be a limit that is not listed. It could be investments you did not make or accounts you do not own. People with accounts in collection often have duplicate collection notices reported for the same account.
Errors come in two forms: high priority and low priority. By removing high-priority erroneous information from your report, you could see your score jump 20, 50, or even 100 points!
Beware, however, of spending too much time on this step. Errors that are older than two years are likely not hurting your credit score that much. As well, do not waste your time correcting low-priority errors. Faster, more efficient ways to increase your credit score are described in the other six steps.

High-Priority Errors Low-Priority Errors
Active collection accounts less than two years old and listed more than once Incorrect address of a mistake in your address (low priority, unless you think you might be a victim of identity fraud or a victim of merged credit reports)
Someone else’s Social Security number or a mistake in your Social Security number (this could indicate that you are a victim of identity fraud, or this could result in your credit report being merged with another person’s report) Wrong date of birth (low priority, unless you think you might be a victim of identity fraud)
Someone else’s name or a mistake in your name (this could indicate that you are a victim of identity fraud, or this could result in your credit report being merged with another person’s report) Other incorrect information, such as your employer
Accounts that do not belong to you Typos in your account numbers (low priority, unless you think you might be a victim of identity fraud)
Mistakes in your payment history that occurred within the past two years Mistakes in your payment history that occurred more than two years ago
Accounts in good standing that are not listed in your credit report Delinquencies older than seven years
Incorrect credit limits
Collection notices that are not yours
Account information—other than duplicate collection notices—listed more than once (high priority if the account is harming your credit; low priority if it is helping your credit

Step 6: Negotiate before paying a bill in collection.
Paying off a credit card after it has been in collection might further damage your credit. Bills that have been turned over for collection affect your score only minimally after two years and are all but erased after four years. Collection notices do remain on your credit report, but they affect your credit score only slightly. However, each time you make a payment on a bill in collection, your credit score will be damaged, and it will extend the amount of time the item stays on your credit report.

If you have a bill that has been in collection, you should not pay it until you get an agreement from the creditor or collection company to submit a letter of deletion to the credit bureaus asking that the derogatory item be wiped from your credit report. When negotiating for this letter, you should never admit that the debt belongs to you.

Step 7: Create a structured plan to protect your credit.
Your credit report changes daily. Once you have started to build good credit, you will need a plan for maintaining it. Otherwise, your good credit can turn into bad credit before you can say FICO. Once you have completed STEP 1 through STEP 6, develop a plan to maintain your credit, as described below.

Create a budget and spend frugally. Make sure you are never late on payments and that you can keep your utilization rate below 30 percent.

Use technology to keep your bills current. Set up automatic payments on all bills that you pay regularly. This way, you will never forget to pay these bills, and your credit will be protected.

Review your credit card bills and bank statements monthly. Check the limit and interest rate and adjust your balance accordingly. Review your credit card and bank statements and compare against purchases you’ve made. If you notice any unfamiliar items on your credit card statement or bank statement, immediately contact the credit card company or bank to determine whether you have been a victim of identity fraud.

Pull your credit report regularly and review the POCKET GUIDE. Contrary to popular belief, if you request your own credit report, you will not hurt your credit score, so request it freely. In fact, the worse your credit, the more often you should pull your credit report. After receiving your credit report, review the POCKET GUIDE and modify your plan accordingly. Make sure that no new derogatory information has been added to your credit report. Also make sure that previously corrected errors on your credit report have not resurfaced. Check for any indications that you have been a victim of identity fraud. For instance, look for names, Social Security numbers, and accounts that are not yours.

Part I: What does a credit score mean?

Posted on August 10, 2021 by - CREDIT BLOG, CREDIT SCORING

I spend a lot of time talking about the importance of building a good credit score, but a lot of people want to know: What does a credit score mean?
In this blog post, I’m going to answer that question, taking a look at two factors:

  1. What does a credit score mean to a lender?
  2. What does a credit score mean in terms of monthly payments?

What does a credit score mean to a lender?
A credit score is designed to give creditors an answer to one question: “What is the likelihood that this borrower will be more than three months late on a payment within the next two years?”
A credit score generally ranges from 300 to 850. A borrower with an 850 credit score (a rarity) is considered the least likely to default on payments while a borrower with a 300 credit score is considered the most likely to default.
A credit score above 720 is considered wonderful. These borrowers will qualify for the best loans and interest rates. Anything below 660 is considered weak credit, and anything below 620 is considered bad credit. A borrower with a score below 620 is considered “subprime,” which tells the lender that the borrower is highly likely to default.
A person’s credit score is the single most important factor in determining whether lenders will approve your credit card application, mortgage loan, and car loan. Generally speaking, lenders look at four things when determining your creditworthiness:

  1. Your credit score.
  2. Your salary.
  3. Your savings.
  4. Your down payment (for a home or car loan).

A person with a high credit score and a modest salary would be much more likely to receive a loan than a person with a modest credit score and a high salary.
What does a credit score mean in terms of monthly payments?
We always say that on a $300,000 30-year, fixed-rate home loan, the difference between a 720 credit score and a 620 credit score is $589 a month, or $212,040 over the life of the 30-year loan. Though this statistic is certainly an accurate representation of the difference a great credit score makes, the truth is that interest rates change daily. During the peak of the credit crisis, a person with a 719 credit score (normally considered a great score!) didn’t even qualify for credit.
The interest rates on a loan are updated daily in tandem with the Federal Reserve’s adjustments. As well, different types of loans call for different interest rates.
According to MyFICO.com’s August 2 listing of interest rates, a person with the best credit score would pay $753 a month on a three-year $25,000 car loan; a person with a 620 credit score would pay $919, a difference of $166 a month or almost $6,000 over the life of the loan.
As you can see, if you want to qualify for a loan and receive the lowest payments, you should learn how to improve your credit score.
And next week, we will take a look at several other reasons to build credit in Part II: What does a credit score mean?

Should I Add a Consumer Statement to My Credit Report?

Posted on August 2, 2021 by - CREDIT BLOG, CREDIT SCORING

The consumer statement does not change a person’s credit score; it simply gives the consumer a voice. The statement, which can be 100 words or shorter, can be used to dispute a mistake:
The Visa credit card account ending in 1234 does not belong to me, and I am currently in the process of disputing this with the credit card company and credit bureaus.

The statement can be used after bankruptcy to explain that a person’s bad credit was caused by a medical condition.

Example of a Consumer Statement on Credit Report

You will a bankruptcy on my report from January 2007. I was the victim of a hit-and-run car accident and was unable to work for eighteen months. As a result, I fell behind on my payments and declared bankruptcy.

Some say the consumer statement will hurt a person. After all, it draws the lender’s attention to derogatory information. Others say the consumer statement is pointless as it most often unread.

Still, consumer statements do have their uses. If you are trying to rent a home, the landlord might read the explanation. If you know a potential employer is running your credit score, you can be upfront—let them know about any mishaps, and direct them to the consumer statement.

How to write a consumer statement

A consumer statement should always be short and to the point. Never place blame on someone else (unless you are a victim of identity theft). If you decide to write a consumer statement:

  • Do not complain or present yourself as a victim (unless you truly are a victim of identity theft)
  • Take responsibility
  • Do not blame anyone or anything
  • Do not justify what happened
  • Keep in 100 words or less

Let’s take a look at two examples:

An effective consumer statement

I experienced bankruptcy because I naively expected the value of my home to go up. Instead, the payments grew and became unmanageable, so I began charging them to credit cards. Have since gone back to the basics and am working on building my credit and my savings. Also taking classes in financial management.

An ineffective consumer statement

The bankruptcy is NOT my fault.  I was sold a home that I couldn’t afford, and while the agent earned his commission, I lost my home, racked up huge credit card debt, and was stuck with poor credit! As far as I’m concerned, the mortgage broker should go to jail!

Do you see the difference? The first consumer statement makes the borrower seem responsible and mature. The second might sound entitled, immature, and irresponsible!

Authorized Users—The Secret to Building Your Score Fast!

Posted on July 30, 2021 by - CREDIT BLOG, Credit Cards, CREDIT SCORING

One of the first pieces of advice I give to people who have suffered severe financial crises and want to learn how to build credit 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 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.

  1. First, the account holder should shred the credit card that arrives for you.
  2. 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 should also protect themselves by choosing the account wisely. Only authorized users who are related to the account holders will see their bad credit scores benefit from this strategy. Therefore, be sure you choose an account holder who is also a relative. Try to choose someone with the same last name and address. Otherwise, the credit-scoring bureaus might not recognize your status as an authorized user, and your credit score might not improve.
To make sure that the credit card company is reporting your status as an authorized user, call them and ask. You can also check your credit report to see if the account is appearing. If not, choose another account holder.
Be sure that you also choose a responsible relative with an account in good standing. If you become an authorized user on an account that becomes delinquent, guess what happens? Your score will drop. As such, be sure to pick an account with a clean history of payments. Be sure, too, that the balance on the card stays low—preferably about 30 percent of the limit. If the balance exceeds 30 percent, or if the account holder makes a late payment, you should immediately remove your name as an authorized user so the negative information does not hurt your credit score.
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.

Credit Bad after Identity Theft – Fastest Way to Fix

Posted on July 14, 2021 by - CREDIT BLOG, CREDIT SCORING

Credit Bad, How to Build Credit, Credit Score – Question #4
Question Submitted by:  Kevin, Tempe, Arizona
I’ve heard you shouldn’t challenge every negative item on your credit report, but my credit is bad due to identity theft.  If I disputed them individually it would take me years to clean it up, any thoughts?
Answer
Good point Kevin.  Yes, if you dispute all your bad credit or items on your credit report at once, the bureaus can deem the request “frivolous” and ignore it.  That is why in 7 Steps to a 720 Credit Score, I recommend you only dispute three items at a time.
Now, if your bad credit is because you were a victim of identity theft, its’ a different story.  In that case, simple submit your police report with the dispute and the credit bureaus will not deem your request “frivolous.”
Make sure you follow my video lessons on how to build credit, as just because you get the bad credit off your credit report, it does not mean that your credit score will be above 720.

First Time Entrepreneur with No Credit wants Business Credit – Possible?

Posted on July 6, 2021 by - CREDIT BLOG, CREDIT SCORING

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.

How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 3

Posted on June 28, 2021 by - CREDIT BLOG, CREDIT SCORING

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.

Credit-Scoring Myths

Posted on June 3, 2021 by - CREDIT BLOG, CREDIT SCORING

Credit-Scoring Myth #1: If I avoid credit, I’ll have a great score.
Fact: Though shunning credit cards and loans might sound like a good idea, going down this path will make your life harder, not easier. Credit scoring systems want to see that you can responsibly handle many different types of credit before they award you a good credit score. If you don’t accumulate a proven track record, you won’t get a good score. And I always say that no credit score is as bad as a poor credit score. Credit companies will be unlikely to advance you a loan, and a bad credit score may prevent you from getting a job or landing an apartment.
Credit-Scoring Myth #2: As soon as I shut down some of my credit card accounts, my score will go up.
Fact: In this case, rather than causing your score to rise, your credit score may drop sharply. Fifteen percent of your credit score is affected by the length of time you’ve had credit. To reach this figure, credit-scoring bureaus take the average age of all of your credit accounts. Canceling several of them could cause your credit score to plummet. A better bet is to pay off the balances on your credit cards.
Credit-Scoring Myth #3: I must retain a balance or else I won’t have a good credit score.
Fact: Unfortunately, this myth has caused many consumers to spend money for no other reason than to preserve a balance on their credit cards, which actually has no effect on a credit score. Credit-scoring bureaus value activity on cards, but they do not add any value to keeping a balance. If you retain a balance, you will accrue interest on the balance, and your utilization rate might increase about 30 percent.
Credit-Scoring Myth #4: I’ve just experienced a bankruptcy, foreclosure, or tax lien and had bills turned over for collection. There’s no way I can get credit.
Fact: The facts of bankruptcy, foreclosure, tax lien, or collections notice on your credit report will have a very negative effect on your credit score, but if you take the proper steps to learn how to improve your credit score after a financial disaster, your score could increase to 720 in two years. As well, some lenders cater to people with bad credit, although you’ll probably have to deal with a high interest rate.
Credit-Scoring Myth #5: As long as I pay my credit card bill in full and on time each month, my credit will be perfect.
Fact: This is a popular myth, but paying your bills on time is only part of the story. You’ll have to add a diverse mix of credit and show that you can responsibly manage several active accounts to fully maximize your credit score.
Credit-Scoring Myth #6: My credit score will increase by paying any account in collection.
Fact: This is not a sure thing. More often than not, your credit score will decrease if you pay a collections account, especially since it will extend the time the account stays on your credit report.
If you want to learn more about the credit-scoring myths, be sure to attend the next teleseminar!

Credit-Scoring Factor #1: Payment History

Posted on May 19, 2021 by - CREDIT BLOG, CREDIT SCORING

In my book about how to build credit, 7 Steps to a 720 Credit Score, I remind readers that a clean payment history is only one aspect of a good credit score. That said, it is among the most important aspects, counting for 35 percent of a credit score.
The credit-scoring bureaus use 22 criteria to design the intricate formulas used to determine a credit score. These criteria can be segregated into five factors (“What Are the Credit Score Factors?):

  1. Payment history
  2. Outstanding balances
  3. Age of credit
  4. Type of credit
  5. Credit inquiries

This blog focuses on the first: payment history.
This portion of the credit-scoring formula looks at:

  • Your payment history on revolving accounts such as credit cards, retail accounts such as gas cards, installment loans such as car loans, finance accounts, mortgages, and other credit accounts. I think it goes without saying that the formula responds better if a credit report has no late payments.
  • The severity of late payments. A 30-day-late payment will be judged less severely than a 120-day late payment. And an account sent to collections will cause the score to drop even more.
  • The presence (or lack thereof) of repossessions, collections, charge offs, and public records such as bankruptcies, judgments, and foreclosures. The fact of bankruptcies and other severe defaults will hurt your score the most, especially if they have happened recently.
  • The recency of late payments. Your payment history if weighed on a scale with the most recent payment activity given more weight than past activity For this reason, recent late payments will affect your score more negatively than aging ones. This is because the scoring models assuming that current behavior is a far better predictor of your future behavior than is past behavior.

In fact, if your prior credit report is spotless but you make on late payment, your score will probably experience a sharp drop. This is because the scoring bureaus will assume you have had a shift in your financial situation. If you make late payments all the time, the scoring bureaus will eventually start making gradual deductions.
This is not to say that one or two late payments will cause your score to plummet so drastically that you are unable to qualify for a loan. One or two blemishes on an otherwise strong credit report might be overlooked. However, if you have a high credit score and make a late payment, you will be docked more points than if you already have a low credit score and make a late payment.
In other words, your payment history is a critical component of your credit score. However, the most important part of this is your recent behavior. The past two years of your payment history are far more revealing than behavior that occurred five or six years ago. And with some exceptions (e.g., bankruptcies, which stay on a credit report for ten years), your payment history from eight years ago is a moot point as most items fall off a credit report in seven years.
In my free teleseminar, I talk about how banks use your payment history to legally rob you of your hard-earned money. Be sure to check it out!

Credit Inquiries Won’t Hurt, As Long As …

Posted on May 15, 2021 by - CREDIT SCORING

“But Phil,” my client was saying, “I don’t want to pull my credit report. Won’t that hurt my credit score because of the credit inquiry?”
My response was, “Nope. A credit inquiry won’t hurt your credit score—at least, not if it is soft.”
Let me explain …
The only kind of credit inquiries that hurt your credit score are “hard” inquiries. Hard inquiries are defined as inquiries into your credit score by a lender for the purpose of determining whether to extend you a loan.
All other inquiries are considered “soft” inquiries, and while they appear on your credit report, they do not hurt your score. So pulling your own credit score is considered a soft inquiry. Likewise, if a landlord or a potential employer pulls your report, the inquiry will not hurt your score. A lender’s inquiry might even be considered soft if it is done to determine whether to change your interest rate.
In other words, pull away! Checking into your own credit report is considered responsible behavior, and you won’t be punished for doing so.
So how many times can you pull your credit report? As many as you want. You can pull your own credit report every single day of the year, and your score won’t drop a single point. But if you have more than two credit inquiries by a lender within a six-month timeframe, your score will probably dip a few points.