Paul Ferraresi

Improving Your Credit Score

Maybe you’re young and haven’t used any credit yet…

Maybe you’ve recently come out of a bankruptcy or a tough financial situation. You may be tempted to pay for everything in cash, not wishing to repeat your past mistakes.

Maybe you think that debt is bad and have always paid for everything with cash.

Many people think that being debt-free is a positive trait valued by lenders. Nothing could be further from the truth. A borrower with no credit is almost as bad as one with bad credit. A creditor wants to see a history of how you handle debts. A person just out of a bankruptcy needs to show potential lenders that they have learned their lesson and are now committed to improving their credit habits.

Now that you know how your score is calculated, you can begin making changes to your current financial planning. Building or re-building a credit report is not a quick-fix situation. It takes a year or two to complete.

The best things you can do are simple.

1. Clean up your credit report as much as possible

First, you must make sure that your credit report is as clean as you can get it. Begin by obtaining a copy of your credit reports and examining them thoroughly for errors. Having your report in tip-top shape will help you immensely when you begin to apply for new credit.

Removing negative items on your credit reports has the biggest impact on your FICO score. Generally, negative items stay on your reports for seven years, but you can hire a professional credit report repair service to do it for you. Most people do not know the ins and outs of the dispute process, so they often hurt their credit further when they try to repair their own credit.

2. Get new credit

Once you’ve cleaned up your credit, you are ready to start building a positive credit profile. Follow any or all of these techniques to stack your report with A+ listings. But be prudent. If you stack too many open accounts, you may be denied new credit based on your debt-to-income ratio; If you show excessive credit inquiries, you may be denied for that.

Piggy-back on a Friend

If you know someone (a good friend or parent) who has good credit, you can “borrow” their good credit listings. This friend must have credit cards and must trust you enough to allow you to become an “authorized user” on his card. Have your friend call his credit card company and request that you be placed on his card as an authorized user. A copy of the card will be sent to you but you never have to use it (you can simply return it to your friend). Your credit file should soon show an open account with all of the positive history that your friend has created over the years from the credit card. A small footnote will show that you are an authorized user of that card. Remember, though, when a new credit grantor reviews your file, he may insist that the balance on the card appear on your debt-to-income ratio balance sheet. That shouldn’t disqualify you for credit if your income is sufficient and you don’t have an excess of debt on your file.

Get a Secured Credit Card

Ask your local bank if they offer secured cards. Many national banks are starting to offer this service. Your past credit is less important with these guys as you will be opening a savings account to secure the credit line on the card. You can get this card even if you still have some bad credit on your credit file. By putting $500.00 into a savings account, you will be allowed to charge up to $500.00 on the card.

Seek Easy Credit

There are companies we work with that assist in finding new credit cards for your credit situation.

3. Keep the accounts active

Once you’ve successfully received new lines of credit, it is important to have some activity going on each month. We don’t suggest you pile up large debt—maybe $50 dollars or so in a balance. Pay the minimum when the bill arrives even though it will cost you a little in interest charges. And pay it on time. This is what future loan officers and other creditors want to see. (Inactive accounts with a zero balance aren’t displaying a tendency to handle existing debts.)

Keep your balances low on unsecured revolving debt like credit cards. High outstanding balances can affect a score. The general rule to follow is to keep your balances below 30% of the available credit limit. If your balances go above %50 of the available credit limit, this will begin to hurt your credit score.

The amount of your unused credit is an important factor in calculating your score. You should only apply for credit that you need.

Traps to avoid in secured credit cards

Make sure the secured card you choose to help you rebuild your credit:

• Reports the credit card limit you have (even if it’s only $200)
• DOESN’T report that the card is a secured card.

If you get a card which reports to the credit bureaus that it is a secured card, your credit score will also take a hit, even if you are paying on time.

Reporting the balance

Credit scores take into account the total amount of credit available to you and the current balance you have on your cards. They use this to calculate your debt ratios which is:

Current Total Balances/Current Total Credit Limits = Debt Ratio.

If they are not able to do this calculation, they will just guess what the limit is and this is going to be your current credit card balance or 100% of your credit limit used. Remember, the scoring model likes to see 30% or less of your credit limit used.

Look forward next week to our Managing Your Credit Score (Part 8 of 8).