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!
Category: CREDIT BLOG
The Faces of Identity Theft
About 80 percent of people have errors on their credit reports, and many of these are a result of identity theft. Identity theft can be a devastating event that gets in the way of learning how to build credit. Once a thief acquires your personal information s/he can quickly suck your account dry or steal your identity, resulting in not only a tremendous financial loss but a considerable outlay of time to put your affairs back in order.
Now, more than ever, you have to be careful about leaving any scrap of personal information available to scheming identity thieves. Take safeguards to avoid leaving yourself open to identity theft, and be aware of the many ways identity theft might occur.
Dumpster diving. One of the more common forms of identity theft is when thieves find pieces of personal information is to rummage through a victim’s rubbish. For example, the credit card offers that you discard without a thought might be used by a dumpster diver to set up credit accounts in your name. Bank account statements that have your credit card number or bank account might even be used to purchase items online or over the phone. To prevent this, purchase a shredder and use it on anything with your personal information.
Open-access mailboxes. If you have a mailbox that is not secured or is a community mailbox, beware of identity thieves snatching your mail and setting up bogus accounts in your name. If you’re going to be away on vacation, protect yourself from identity theft by asking the post office to put your mail on hold so no one can grab it.
Pickpockets and purse-snatchers. Make sure you never leave your purse or bag unattended. Having access to your credit card and driver’s license is an identity thief’s dream. For that reason, never, ever carry your Social Security card in your wallet.
Phishers and Phreakers. Be especially wary of phishers and phreakers, the newest form of identity theft. Phreakers are people who search for personal information by eavesdropping on telephone calls. Phishers send cleverly disguised emails that ask you to provide personal account information. Using anti-virus software and a firewall is a good way to cut down on malignant attempts by criminals to access your information. Do not share your password with anybody and change it often to decrease the possibility someone may hack into your computer. Also watch out for spyware, which is often installed on your computer without your consent. It can monitor your computer for personal information, such as credit card numbers.
Keep a close lid on your Social Security number. This is your most sensitive personal information, and when an identity thief gets your Social Security number, s/he can easily steal your identity. Do not give out your number unless you started the call and can confirm the identity of the person/company you are calling.
Always keep track of your credit report. Regularly checking your credit report is the best weapon you have against identity theft. Request copies of your credit report at least four times a year. You can get a free annual credit report once a year. Follow up to see any suspicious information or other irregularities show up. Another important safeguard against identity theft is double-checking the purchases on your credit card and withdrawals from your bank account.
Credit-Scoring Factor #1: Payment History
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?):
- Payment history
- Outstanding balances
- Age of credit
- Type of credit
- 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!
How to Qualify for a Loan
In today’s rough environment, knowing how to build credit isn’t enough if you want to also know how to qualify for a loan.
Ideally, a loan sits on a stool with four legs: income, down payment, savings, and credit score. If necessary, a stool can stand with just three legs. It cannot however, stand on just two, and it is important for would-be borrowers to understand this when learning how to qualify for a loan.
You are going to need at least three out of four “stool legs” to get a worthwhile loan.
Before applying for a loan, understand that the lender is in the business of earning a return on its investment. The lender could invest in the stock market, bonds, annuities, mutual funds, or any number of other things. The lender is only interested in giving you a loan to you if the lender can earn a worthwhile return in the form of the interest payments you make as the loan is paid.
To make this determination, the lender considers the four stool legs we discussed.
How to Qualify for a Loan—Stool Leg Number #1: INCOME
The lender considers your income. The higher your income as compared to your existing debts (your “debt-to-income ratio”), the more likely you are to make your monthly payments.
How to Qualify for a Loan—Stool Leg Number #2: DOWN PAYMENT
Next, the lender considers the down payment you are going to make on a loan attached to property (such as a car or home loan). The bigger the down payment, the more protection a creditor has. First, the property has more equity invested in it, meaning it is more likely to have enough equity to be sold at a profit to pay off the loan. As well, the borrower has more invested in the property and is therefore more likely to prioritize loan payments.
How to Qualify for a Loan—Stool Leg Number #3: SAVINGS
The lender considers your savings. Also called “reserves,” your savings are important because they tell the lender your likelihood of weathering any rough spots in your life, getting back on your feet, and making those loan payments.
How to Qualify for a Loan—Stool Leg Number #4: CREDIT SCORE
Finally, the lender considers your credit score. The credit score gives the lender a glimpse into your character and how important it is to you to keep your word and repay your debts. It also further assists the creditor in analyzing your ability to repay by revealing whether you are already carrying large amounts of debt.
When considering how to qualify for a loan in today’s market, a person really needs four out of four stool legs, though some exceptions might apply. If the would-be borrower is strong on any three out of the four, a lender might make an exception, even if his fourth leg is weak. A strong income may make up for a lack of reserves. Or a high credit score can make up for a small down payment. In normal lending environments, a borrower with a strong income, lots of savings and a big down payment will probably be allowed to slide on a mediocre credit score, but s/he would pay high interest rates.
For major purchases, like cars and houses, it’s worth thinking about these four criteria at least six months to a year in advance of applying for a loan.
Keep your income as high as possible when learning how to qualify for a loan. You can get a second job or work to bring home additional commission. This will help your income, savings, and down payment. Dedicate as much of your monthly earnings to a savings account and maximize your reserves. Learn how to create a budget. If you have family members willing to help you with the down payment, get the money from them in advance so that when the lender looks back at several months’ worth of bank statements, the lender will see consistent higher balances. (Keep in mind that you should discuss the tax consequences for cash gifts with a tax consultant.)
Get a copy of your FICO Score and review it for any errors. If you find them, contact the credit bureaus and follow their steps to have the information corrected. Make all you payments on time, and try to pay down your balances on existing accounts. Attend our free teleseminar so that you can learn how to improve your credit score quickly.
Although the four legs of our stool are the most important criteria, learning how to qualify for a loan means that you take a look at some smaller factors as well. How long have you been at your current job and address?
- People who move around a lot are generally consider bigger risks than borrowers with proven job stability and a permanent address. From a lender’s perspective, a stable lifestyle—two or more years at the same address—equals a safe investment.
- In addition, the lender wants to know that you have a history of making plenty of money to afford the loan. Ideally, your job should also be stable, meaning you have been employed for at least two years at the same company.
In today’s market, knowing how to qualify for a loan can be tough. Lenders have more stringent guidelines than ever before. Remember to start early and learn everything you can about building picture-perfect credit!
Key Considerations About Divorce and Credit
While divorce often causes a person to take inventory, many people forget the implications of divorce and credit. Many married couples or life partners jointly apply for credit cards, auto loans, and mortgages. Part of learning how to build credit means that you learn about how divorce can complicate your credit situation.
If you and your partner kept all credit separate during your marriage, you will not be impacted by your ex-spouse’s credit behavior at any time before, during, and after your marriage. However, if your spouse is an authorized user or joint holder of a credit card, an angry former spouse can start lots of problems with respect to divorce and credit. With joint accounts, both you and your ex-spouse are jointly responsible for debt and therefore are affected by each other’s financial decisions. For example, your ex-spouse’s late payments and collection notices show up on your credit report after the divorce if you have not split the accounts.
The best move is to cancel these cards rather than risk the negative effects of someone else’s mismanagement. Some credit card companies may require a special type of notice to cancel jointly held cards, such as a written notice. Doing this as soon as possible is in your best interest in terms of divorce and credit. After a divorce, your ex-spouse may need to charge many things to make up for reduced income. Even if your ex is not being malicious, this could harm your credit score by causing your utilization rate (the balance as a percentage of the credit card limit) on jointly held credit cards to increase.
If you and your ex-spouse own a home together, both are charged with paying off the debt unless you work out another arrangement. Aside from selling the house, your best option may be to pursue refinancing. Using a quitclaim deed, you can take your name off the title of the property, but this is not enough when it comes to divorce and credit. Your ex must also refinance, or your credit will suffer if he or she becomes delinquent on payments.
On the other side, if you retain ownership of the home and do not put the property in your name, you could be affected if your ex-spouse is sued. The house might be seized to pay off your spouse’s debts.
If you are separated, you may want to take a few steps to prepare yourself, especially if you think you are heading toward divorce. Pull your credit report and assess your financial situation, noting all existing credit accounts. Keep copies of everything in a safe place. If you have joint accounts, have a discussion with your spouse about who will assume payments for which credit accounts. If you are on peaceful terms with your spouse, have a frank discussion about divorce and credit, and how you can both protect yourselves. Consult an attorney, and create a plan to keep your payments on schedule and your credit protected.
To protect yourself from the pitfalls of divorce and credit, cancel your joint accounts, and make sure you contact all credit bureaus to ensure that your address information is updated.
What Are the Credit Score Factors?
Question: What exactly are all the credit score factors I should consider when learning how to build credit?
Philip Tirone’s Answer: There are actually 22 criteria that go into determining a person’s credit score. These criteria can be organized in five credit score categories:
1. Payment History—The first of the credit score factors, your payment history, accounts for the largest percentage of your score: 35 percent. Do you pay your bills on time? How many late payments have you had? How severe are your late payments? How recent are your late payments?
This credit score factor takes a look at the answers to these questions. If you always pay your bills on time, your credit score is probably better than someone who rarely pays on time. If you have a lot of recent late payments, especially if they are more than 90 days old, your score is probably low.
This component considers your credit cards, mortgages, car loans and other installment loans, student loans, and retail credit card accounts. It also looks at the details of your late payments. Late payments within the past six months have the greatest impact on your credit score; late payments that are more than 24 months old have less impact on your credit score.
2. Outstanding Balances—This is the second-most important of the credit score factors, comprising 30 percent of your score. In short, the less you owe in relation to your limit, the higher your credit score.
Among other things, this criterion considers your “utilization rate,” which is the debt you carry on a credit card as a percentage of your credit card limits. Credit cards with balances that never exceed more than 30 percent of the limit provide for better scores.
This category of credit-scoring also looks at how much you owe on home loans, car loans, or other loans versus how much you originally borrowed. If you have a new loan, credit-scoring systems usually consider you riskier than someone who is five or ten years into a loan. Loans usually take about six months to “mature,” meaning they might harm your score at first, but after six months of on-time payments, your score will probably start to climb.
3. Age of Your Credit History—Credit-scoring is a lot like wine: the older the better! This is the third of the credit score factors, and it accounts for 15 percent of your score. The longer an account ahs been open, the better. This component looks at individual accounts, as well as the average age of your accounts.
4. Mix of Credit—The fourth of the credit score factors, this looks at the type of credit you have, accounting for 10 percent of your score. Credit bureaus respond best if you have a mix of credit. Ideally, you should have three to five credit cards, a mortgage, and an installment loan.
Contrary to popular believe, having too little credit can hurt your credit score because the credit-scoring models will not have enough information to determine whether you can responsible manage debt and high limits.
5. Credit Inquiries—This is the final of the credit score factors, and it counts for 10 percent of your score as well. Anytime you apply for credit, the creditor will run a credit check, which causes your score to drop slightly.
But keep in mind that inquiries into your own credit do not affect your score. Only inquiries by a lender or creditor will hurt your score, and the damage will be minimal. As well, inquiries stay on your report for only two years, and they affect your score for only one year.
Give Your Testimonial for a Chance to Win $500
As you know, I love receiving testimonials from my happy and satisfied clients. So for fun, I have decided to host a challenge on who can give the best testimonial about their success with my 7 Steps system… AND I’ve made it SUPER EASY. Just follow these simple instructions:
You will need to record your testimonial by calling 1-800-609-9006 Ext. 9038.
Please use the following script as a guideline for your testimonial (fill in the blanks):
- Hello, my name is ___________________ (first and last name) from ________________ (city), _____________(state)
- What I love about Philip’s system is ______________________________ (make sure this flows from the heart)
- The specific results I achieved because of Philip’s system are_________________________________ (examples: higher credit score, low interest rate, money saved per month, etc. – the more detailed the better)
- Philip, I want to thank you for __________________________________ (fill in the blank)
Be sure to end your recording with your phone number, as we will be contacting the winner by phone.
Once you have submitted your recorded testimonial, email a digital picture of yourself to info@720CreditScore.com. Once your entry has been received, we will confirm receipt via email. If you do not receive a confirmation email from us, within 48 hours call us at 1-877-720-7267.
All entries must be eighteen (18) years of age or older and submitted no later than Saturday, May 15th 2010.
The winning prize for the best testimonial will be $500. The winner will be selected based on the following three criteria:
- Success with the system – Increase in credit score (before and after score), time it took to increase your score, your savings per month due to your increased credit score.
- Communication – Effectiveness in communicating your success story in a clear, expressive, and genuine way.
- Presentation – Creativity of your script
The winner will be contacted by a 7 Steps to 720 representative and we will post the winning testimonial on this site on Friday, June 4th 2010.
Thanks for your support!
Collections on Credit Report
Among the most-asked questions about credit scores is this: What do I do about my credit score if I have a collections on credit report?
For sure, having a collection account on your credit report is a big deal. Creditors will be unlikely to grant you a loan if you do not pay your bills. Though a collection account is not as big of a deal as having foreclosure or bankruptcy facts on your credit report, your credit score will suffer.
And though it sounds crazy, making a payment on a bill in collection might cause your credit score to suffer again. Bills that have been turned over for collection hurt your score only a bit after two years, but as soon as you make a payment, your score will be damaged again. As well, making a payment renews the seven-year period in which an item stays on your credit report.
So what do you do about those pesky collections on credit report? Paying your bills is your responsibility, even if it causes your credit score to suffer. However, you can and should negotiate with the creditor or collection agencies to minimize the damage.
Especially in today’s economy, you might be able to negotiate to pay less than the full amount of the bill. Though this doesn’t remove the collections from your credit report, paying a lesser amount can surely help your pocketbook!
Better yet, consider negotiating for both a smaller payment and a letter of deletion.
Not to be confused with a letter of payment, a letter of deletion is basically a letter they send to the credit bureaus saying that the bureaus should remove the collections on credit report. This is obviously the best-case scenario. Your credit score will surge if you can get a letter of deletion that wipes the collection from your credit report!
Qualifying for a letter of deletion is tricky, though. This technique will work best if the collection item was not correctly sent into collections.
The Fair Debt Collection Practices Act limits the ways creditors and collection agencies can contact you. If you believe that they have violated the Act, you might be able to get a letter of deletion, so long as you promise to pay the collections on credit report. The most common violation of the FDCPA occurs when a collector fails to advise debtors about their right to dispute part or all of the debt within 30 days of first contacting the debtor.
Closing Credit Card Accounts
As part of your plan for learning how to build credit, you might wonder if you should start closing credit card accounts. After all, if you have more than five credit cards, you have more than the ideal number.
True, credit scoring systems are happiest if you have no more than five credit cards. But before you make that call to the credit card company, be aware that closing credit card accounts can have a major impact on your credit score. Keep in mind a few basics about owning credit cards.
Fifteen percent of your credit score is derived from the age of your credit accounts, with older credit accounts giving you a better score. This part of your credit score is based on the average age of your accounts. As a result, every time you terminate older accounts, you drive down the average age of your accounts considerably and risk decreasing your credit score.
You should also consider how closing credit card accounts will affect the portion of your credit score that considers your credit card limits and balances. Your “utilization rate” is the ratio of your credit card balance against your credit limit, expressed as a percentage. If you have $800 of debts on a credit card and your available line of credit is $2,000, your utilization rate is 40 percent. Since credit-scoring bureaus reward people who have utilization rates below 30 percent, you should try to always keep your utilization rate under that threshold.
Closing credit card accounts can impact your utilization rate in a couple of ways. First, if you decide to cancel a credit card and transfer the remaining debt to another card, you may cause the utilization rate on the second card to rise sharply, which will cause your credit score to drop. Even worse than transferring a balance is leaving a balance on your card after canceling the account. If you leave a $700 balance on the canceled card, your utilization rate will suffer dramatically since the limit on the card will be $0.
So what is the plan for dealing with a bunch of credit cards? Even FICO agrees that closing credit card accounts is a bad idea. Your best bet is to keep all of them active but pay them off every month. You can even find ways to live debt-free and keep your credit cards active. A steady history of payments will demonstrate to credit-scoring bureaus your ability to manage your accounts and will eventually improve your credit score. Pay special attention to the cards with the highest limits, oldest ages, and best interest rates. Be sure to keep these cards active, maintaining a utilization rate below 30 percent.
A final note: Retail credit cards (those associated with a specific store, such as Bloomingdales) are an exception to the “keep-them-open” rule. Keeping a balance on these cards may be difficult since you probably do not need to buy something from these stores each month. Letting a retail account go inactive may not be the ideal choice, but it should not be a cause for alarm unless it causes your credit score to drop, in which case you might be able to reactivate the card with a simple phone call.
How to Build Credit Fast
People regularly ask me for tips on how to build credit fast. Among the usual—paying down credit card limits and becoming authorized users—I tell spouses to leverage each other’s credit scores.
For a variety of reasons, you might need to learn how to build credit fast. Maybe you are applying for a loan and want to secure lower interest rates. Perhaps you are a candidate for a job at a company that runs a credit check before hiring new employees. (After all, 60 percent of companies run a credit check at least some of the time.)
If you have a balance that exceeds 30 percent of the limit on a credit card, you can transfer a portion or the entire balance to your spouse’s credit card.
This is among my favorite tips for how to build credit fast because it makes a huge difference. With the credit scoring systems calculating outstanding debt as 30 percent of your credit score, your score will quickly increase if you lower your outstanding debt. You can then walk into the loan application or job interview with low personal debt and a higher-than-usual credit score.
Though you might lower your spouse’s credit score, you can quickly “buy back” the debt using your credit cards once you secure the loan or job. Of course, you will need to repay the favor if your spouse ever needs tricks for how to build credit fast!
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