Credit Tips to Increase Your Credit Scores

Why are Credit Scores so important? 

- Credit scores directly effect many financial transactions you do, including:  buying a home with a mortgage, borrowing money to purchase a car, applying for credit cards, and even applying for a job.  Making sure your credit score is as high as possible is one of the easiest ways of saving money every month.

- Your credit score tells a lender very quickly and efficiently how likely you are to default on a loan.  The lower the credit score, the higher the interest you will have to pay - because the lender has to take on more risk to lend you money based on your past credit history.

- Make sure you take steps to increase your credit score today so the next time you apply for a loan, insurance, credit card, or even a new job you will confident about your high credit scores.  It is estimated that on a new car purchase for $20,000, the difference in payments between a person with good credit and bad credit is almost $10,000 over the course of five years. This number gets much bigger if you are looking for a mortgage since you are paying very high interest over 5 to 30 years. You should do everything you can to increase your credit score and remember to check it before making a big purchase (house, car) so you can minimize your interest costs.

Here is a summary of steps to increase your Credit Score

- Get your credit reports and scores.  If you don't have this yet, this is crucial because you need to know exactly what is on your current credit report and what your current credit scores are.  By understanding this information, it will tell what actions you need to take to make sure your credit score is as high as possible.

- Using information from your credit report, you need to make the determination why your credit is adversely affected; high debt levels, derogatory (negative items, late pays, charge offs, etc.) items, or a mixture of both.

- Using the information provided in this article, learn how to fix issues related to high debt levels and removing derogatory (negative) items on your credit report.

FICO Credit Scores vs. Credit Scores

- Many people confuse official "FICO credit scores" with "credit scores" that are usually advertised.  The big difference between the two is that only Equifax, TransUnion and Experian (the big three) provide you with the real FICO scores that 90% of all lenders use.  If you sign up for any other credit report services, you will be provided a "credit score", however, this "credit score" may or may not be close to your actual FICO scores. For this reason, I recommend you use a reputable CRA for FICO scoring!

- Call me and I will obtain your credit report through a prominent National Credit Reporting Agency at my cost of $25!

How Credit Agencies Determine Your Credit Score

- The three main Credit Reporting Agencies are Experian, TransUnion, and Equifax.  Since some lenders only report to one of these three companies, you will probably have three different credit scores based on the different information each one has about you.

- Your credit score is determined by the following estimated % breakdown:

         35% Payment history

         30% Outstanding debt

         15% Length of your credit history

         10% Recent inquiries on your credit report

         10% Types of credit in use

- Below is a table showing a sampling of possible different score ranges and how they can affect a mortgage payment:

- Once you've received your credit report, look at the percentage breakdown above and focus on the things that will help you increase your credit scores such as payment history, negative items, and outstanding debt.  

- You will lose some points if there a number of credit inquiries over time for applications such credit cards, auto loans, department store credit cards, etc. that you have initiated.  Think about this next time you get an offer for 10% off your purchase just for signing up for a store credit card, and just say NO!

- You should never apply for credit if you are not very confident that you will get approved. You might save $20 now, but you could lose much more later due to a lower credit score.  Plus if you forget to make payments, it will really negatively affect your credit, and you might be charged late fees, etc.  Store cards usually carry the highest fees and interest. .

- Also, if you are shopping for a car or mortgage, try and keep all the inquiries to within two weeks since credit scoring companies will only treat all these as one "inquiry" on your credit report, instead of multiple inquiries.

- Another key thing to remember is your credit score is not based on how "clean" your credit report looks.  You may have many things on your credit report that drag on for years, but remember these are good things since they show a long credit history.  As long as they don't show late payments, they are adding points to your score because you have proven to be a reliable consumer who can pay back debts in a timely matter.  Lenders are really looking for these types of people, consumers who take on debt and then pay it back on time.  Only focus on those that are negative and recent (within the last 3 years!) first.

- Don't bother contacting these old vendors and trying to close accounts since it might actually hurt your score!  The items you are very interested in are late payments, judgments, delinquencies, etc.

- You can close accounts that are less than a year old, however I recommend focusing your energy on things that can really make a big difference.  If you have negative information that is over 7 years old on your credit report, go ahead and dispute it since it legally can be removed. 

- However, if your credit score is low because of late payments, derogatory (negative) items, etc., then you really need to review your credit report and challenge any and every item that YOU think needs to be challenged!

How to Dispute Items on Your Credit Report  

- The first thing you need to do is to make sure everything on your credit report is correct.  Go through your report with a pen, and mark things you think are inaccurate or incorrect first.  If you see something inaccurate, make sure you dispute it with the credit agency.  If you have negative items on your credit report that are older than 7 years, go ahead and dispute them since they should be removed.  There is no law that says things have to stay on your credit report for any length of time!  Remember, you have legal rights to dispute information that may be incorrect on your credit report.

- Most credit repair organizations recommend using a hand written letter to dispute incorrect items with credit agencies.  Make sure you mail the form via regular US mail and note the date it was mailed; However don't force the agency to sign for the letter using registered mail.  If you are going to use a letter dispute form, again make sure you use your own handwriting, because it lets the credit agency know that the letter is a real dispute letter and not just a computer generated form letter. This technique usually works the best.

How to Dispute With Creditors

- By law, the creditor (vendor) must prove the accuracy of what you are disputing within 30 days. If they don't, the item is simply removed from your credit report. If you have additional evidence, then submit the evidence with the dispute form and they will have to remove the inaccurate data within 30 days or prove that it's accurate. 

- If you doubt that an item is 100% accurate, dispute it anyway since the creditor will have to prove that the information is accurate.  Many times they can’t do this since they might have lost the records, don’t have the time to deal with it, etc.  A good time to dispute is around any holiday, where the vendor may not have the time to respond to inquiries because they are busy selling new items, not worried about debts from many years ago.

How to Remove Negative Items

- A proven approach to remove late pays (30, 60, 90, etc.) is to mail a letter explaining why you were late, and asking the creditor for their “goodwill” to remove it.  This usually works well if you have a current relationship with the company, for example a current credit card (another reason not to cancel old cards)!

How to Negotiate with Creditors and Collection Agencies

- If you have any accounts in collections or that are very past due on your credit report, you need to get them removed to really increase your credit score. For these items you will have to contact the creditor or collection agency directly.  If the collection agency already has the debt, then deal with them and don't bother calling the original creditor (collection agencies are companies that are hired to collect debts from you by the original company you borrowed money from)!

- Most negotiating advices are to offer to pay 40% of your debt and negotiate upwards from there ONLY if they remove you bad credit history off your credit report. (Not just have it marked "Paid", very important)!  Make sure you get this in writing.  Most agencies will take the opportunity to collect the bad debt and happily remove the bad credit history from your report, instantly helping you to increase your credit score.  Also, I recommend paying these agencies with a money order, and using a return receipt.

- For example, settling a $2,000 debt for $1,000 and having the agency remove the bad credit history on your account will dramatically increase your credit score, and will be well worth it since you will be saving much more money on future interest costs with the higher credit score.  Negotiate hard with these agencies, but remember your goal is to get the bad credit history removed from your report, and again remember to get everything in writing.  Removing these items will dramatically increase your credit score since derogatory items are weighed heavily in your credit score calculation. 

- If you have already paid off these derogatory items, sometimes disputing it with the agency or original creditor again may work since it will be their burden to prove the bad credit history, and they usually won’t bother disputing it since it's already been paid off and it's even more work for them.  However, I really recommend taking care of the issue before you pay off the debt, when you have the most negotiating leverage (before you pay them back a cent)!

Other Ways to Boost Your Credit Score

- Remember, the more open credit lines and higher credit limits you have, the better your credit scores will be.

- If your credit needs some quick boosting, and you have extra cash, pay down as much of your debt as possible. The lower your ratio of current debt to available credit limits the better you look to a lender, and the higher your credit score will be.  The flip side of this is to call existing credit card accounts you may have and ask them to increase your limit, though you won't actually use it.  You should do this as often as possible, even if you don't need the credit. This will also increase your credit score. Do not open additional credit card accounts to increase this ratio, since that may hurt your credit unless you have less than 4 open credit cards. But increased credit limits on existing accounts will help since you will be lower your overall debt ratio. For example, if you have $10,000 in debt with a $15,000 credit limit, your ratio is 2/3 or 67%.  However, if you increase your credit limit to $20,000 or pay down your $10,000, you will lower your ratio 50% or less, which will help your credit score. 

-   Cancel some cards if you have too many, but if you are carrying debt try to keep the ratio of debt to available credit limits at around 20%, with about four cards for the best credit score.  Don't cancel cards if it will put you below this ratio, and if you have to cancel cards make sure you only cancel ones with less than one year of history with.  Do not cancel cards that are older then one year, remember your credit score does not get points for being clean of old accounts!  Focus on doing the right things in order to increase your score, not cleaning up your report of old accounts.  Cleaning up may actually have a negative impact on your credit score, yet most people do this first!

-  Another great way of helping your score is by spreading your debt to different cards.  Although you may pay more interest, your credit score will improve since not all your debt will be on one card that is close to it's credit limit.  For example, if you have $20,000 limit on one card with $18,000 of debt, and have another card with a $15,000 limit with $2,000 of debt, its better to move $8,000 of debt from the higher card to the lower card.  By doing this you will lower your ratio of debt to available credit on the one card, helping your credit score even though you haven't really paid anything down!

-  Pay your bills on time by having them automatically deducted from your bank account or paid online before they are due.  Being consistently late with payments is the easiest way to lower your score, and also the easiest way to keep your credit improving month after month - just pay your credit card bills on time or early! Even if you can only swing the minimum payment, get the payment there BEFORE the due date. Most credit card companies allow you to pay online, so make sure you take advantage of this and don't waste time and money on stamps and mailings.  Keep the amount of credit cards you have to a minimum, so you don't forget to pay them (no store charge cards)!  Remember only apply for cards that you really think you will get approved for.

-  Use credit cards for everyday purchases, and then pay your credit cards in full monthly.  Charge as much of your monthly bills as possible on your credit cards, then pay them off every month.  If you happen to use a DEBIT card, these transactions do not usually appear on credit reports.  By using credit cards, you help build credit history and this helps increase your credit score.  Remember, if you are carrying a balance on any credit card, do NOT use it for everyday purchases since you will be paying interest from the first second you buy something new on that card.  If you are not carrying a balance, the credit card company will not charge you any interest as long as you pay it back in full every month.  This is a key point to remember!  Only do the above if you have the self-discipline to pay back your credit card every month.  Again, if are carrying a balance, do not charge anything on the credit card that has a balance!

- If you have no debt and have had no credit history within two years, go get some!  Even though you don't need to fix your credit score, you do need to create some credit history. This may sound strange to take on debt, but it works very well since it shows you can borrow and pay back large amounts of cash. Begin responsibly using a credit card for as much as possible and pay it back in full every month, or you can even leave a little bit of debt on it (less than 30% of the limit).  Or take out one of those promotional low % point loans from one of your credit cards for up to 50% of your credit limit, put the cash into an account, and pay it back slowly (but before the special interest rate expires, but don't spend it).  You will notice your scores dramatically improve after you have paid back the debt since you have now created good credit history.  Remember, it's never too late to start building your credit and since it takes time, take the right steps today.

- By looking at your credit report, find out how often and when your lenders report.  By timing your payments to right before they report to the credit agency, you will be able to show less debt and thus have a higher score!  Again, this is why it's important to get your credit Report to learn what is out there so you can find out what and when things are being reported.  Even though you may have the same debt, by timing payments you can increase your score since your debt will appear in the best possible light for that time of the month.

-  If you have a very low credit score and need help rebuilding your credit, you might want to try this method of creating positive credit history.  First, go to your local bank and setup a savings account for $1000 for example (the more money you use, the better). Then, ask for a secured loan for $1,000 against the deposit.  Most banks will give this to you since they have no risk, if you don't pay them back they simply take the $1000 you deposited.  You can then go to another bank, and do the same thing with the $1000.  This should not be done this with more than two banks!  Then pay back the loans, deposit more money, and take out another loan and keep paying it back.  By doing this, you will be creating recent, positive credit history since the banks will report to credit agencies that you paid back your loans within a short amount of time.  Another benefit is that you will not be out any real money, and your only cost will be the interest on the money which should be minimal compared to the positive credit history you are creating.

One More Great Tip

- If you have a partner/spouse, relative, or even a friend with great credit history, have them add you to their credit card.  This works very well since you will get credit for their payment of bills, and this will create more positive credit history for you.  You don't even have to have them give you the credit card, as long as they charge one item onto the card in your name you will be get positive credit history from them.  Again, anybody can add you to their credit card as an authorized user, and you get positive credit history added for their good credit.  The only thing to keep in mind is that the credit card issuer should ask for your social security number before issuing the card or you will not get any positive benefit from them.  Recently credit agencies have said they plan on not allowing this technique to work anymore, however they won't implement this change until 2008, so it still works for now.

- Make sure you always read the fine print carefully before signing up for anything.  Some of these credit cards are so tricky in their fees that you are bound to make a mistake (miss a payment, etc.) and they can end up actually hurting your credit score!  Some of these bad credit score credit cards don't send you statements, and then charge you a fortune for not paying them on time!  Be very careful with these cards, and always read the fine print, not the big print marketing.

Summary of Raising Your Credit Score Steps:

1.  Get your credit reports and scores!  Call me!

2.  Using information from your credit report, analyze why your credit scores are low.  Is it because of high debt levels, derogatory items, or a mixture of both?

3.  Use the tips in this article to fix issues related to high debt levels or minor issues related to incorrect data on your credit report.

4.  Do your due diligence and contact the vendor or Credit Reporting Agency to challenge derogatory items.

5.  Make sure you have at least three open credit lines

6.  Make sure you fully understand your past credit mistakes. Also, make sure you use our tips to keep your credit score high in the future.

Good Luck!!!