Divorce can be a tough time in many ways. You’re dealing with emotional issues, separating assets, possibly separating children from one of their parents, and trying to get your respective lives back in order. The last thing you need to be worrying about is whether or not your former spouse could be ruining your credit score.
I first met Sheila when she was applying for a home loan. She had a bad credit score because the mortgage on a home she bought with her ex years earlier was dangerously close to foreclosure. “I don’t understand why this should affect my credit,” said Sheila. “I have a divorce decree and a quitclaim deed. Isn’t that enough to protect myself from the problems associated with divorce and credit scores?”
I explained to her that those documents were not, in fact, enough to protect her. The fact that she and her ex jointly applied for the mortgage loan meant that the bank still considered her just as obligated to make payments as her ex. This continues until one person refinances the loan in his or her name.
If your ex keeps the home but does not refinance it into their name alone, your credit score will be damaged if your ex becomes late on a payment. On the flip side, if you get the house and don’t refinance, your ex is still legally responsible for the payments as well. And what if they get sued? The courts could attach a lien to your ex’s properties, which could include your home!
Divorce and Credit Scores Rule #1: If you are going through a divorce, you must immediately refinance the home in the name of the spouse who retains ownership. During the transition process, protect your credit by making mortgage payments directly to the bank.
Divorce and Credit Scores Rule #2: Separate any and all jointly held accounts, as well as accounts that list you or your ex-spouse as an authorized user. This includes credit cards and auto loans.
Even in the “best” divorces, couples often have a hard time separating finances and agreeing to the terms of the divorce. Divorce often means that a couple has less access to resources. One household becomes two households, and you might end up paying 100 percent of the overhead instead of 50 percent. Finances can become tight. Even if a person has plenty of resources, the pressures of divorce, custody, courts, and moving can wreak havoc, causing a person to make late payments simply because other items on the “to do list” are taking priority.
For this reason, cancel all jointly held accounts as soon as you begin the process of divorce. You might need to close the account entirely, or you might be able to transfer the card into one spouse’s name. Regardless, decide who will carry the debt, and transfer balances accordingly.
Likewise, remove your name from any accounts on which you are listed as an authorized user. And remove your ex’s name from any of your accounts. To protect your credit score,you should also refinance cars in one spouse’s name only. If you have questions about the procedure for separating accounts, simply call your bank and explain your situation.
Tag: credit score
3 Credit Scams That Are Hurting Your Credit Score
The Credit and Debt Summit is exposing one credit scam after another. This time, credit expert Brian Diez exposed three credit scams that could be hurting your credit score and your ability to secure a loan.
Are you a victim?
Here are the three scams:
Credit Scam #1: Lenders oversee themselves.
Lenders report information to the credit bureaus. If you submit a claim that disputes this information, guess who is responsible for verifying the information? Lenders.
Imagine that you were to file a lawsuit against a doctor. You arrive at court to prove your case, and the doctor is sitting on the jury responsible for deciding whether your case is valid.
Such is the system of repairing errors on a credit report.
Credit Scam #2: Lenders benefit from errors.
And it gets even worse. Lenders benefit from sloppy records. If a lender causes an error to appear on your credit report, your credit score could drop. In turn, the lender can charge you more in interest.
“This scam is propagated by a system that almost guarantees errors,” Diez told attendees at the Credit and Debt Summit. It works like this:
The computer systems that collect information from lenders and then report this information to the credit bureaus do not require an exact match. If a Social Security number matches a last name, the system considers it “good enough,” even if the first name and address don’t match.
You can see how easily a mistake can appear on your credit report. In fact, 44 percent of reports of identity theft are nothing more than a merged credit file.
Credit Scam #3: Unless you are a politician, celebrity, or attorney, your complaint will not be taken seriously.
Making matters worse, if you try to correct an error on your credit report, you will have to jump through hoops … unless you are “someone important.”
Let’s imagine that you are one of the many people with an error on your credit report. (About 80 percent of people have at least one credit report error.) You contact the lender to report the mistake. The lender tells you to send a letter, which you promptly drop in the mail.
If you are a celebrity, politician, or lawyer, your letter will be handled immediately. Otherwise, your letter will be sent through a computer system that is responsible with determining whether your complaint is frivolous. If the computer says the letter is frivolous, your complaint won’t even be processed.
If the computer decides that your complaint has merit, your letter will be outsourced to Costa Rica, the Philippines, India, or Jamaica. A foreigner who most likely speaks English as a second language will be responsible for reading your letter and assigning a two-digit code, which determines the next action that should be taken on your complaint. Now a computer will spit out a letter telling you what will happen next.
Instead of doing actual research, Diez says the lenders just take the easy way out. So unless you are a celebrity, lawyer, or politician, you will be treated like a commoner. The worst part, your credit score just keeps dropping.
The Retail Store Credit Card Scam
Been hit up lately by sales clerks promising big savings if you apply for a retail store credit card?
Just about every major clothing, electronics, and department store offers a similar promotion: In exchange for applying for a retail store credit card, you will get a discount, coupons, or special offers reserved for cardholders.
But if you apply for a store-specific card, you will most certainly not save money. And you just might hurt your credit score, too.
Never Apply for a Retail Store Credit Card!
Let’s take a look at a typical interaction at a department store. Imagine that you walk to the cashier with your loot in hand—in this case, let’s say you are buying a shirt and a pair of socks for a total of $62.
The cashier immediately makes you an offer.
“Do you want to apply for a retail store credit card? You’ll save 15 percent on today’s purchases.”
Heck yes! you think, gung-ho to save $9.30.
But the cashier isn’t telling you a few pertinent pieces of information. Let’s take a look at two of the critical facts you should know before applying for a store-specific credit card.
Never Apply for a Retail Store Credit Card
Reason #1: You will pay more than you save.
Many stores promote their retail store credit card by offering a one-time discount on same-day purchases. But you will most certainly end up paying more than you saved. The banks and the retail stores promoting these store-specific credit cards are counting on you spending more money so that they can recoup that discount, and then some.
Consider all the ways the banks and the retail stores can make money off you:
1. If you are given a one-time offer to save on today’s purchase, you just might pile a few more items into your shopping card.
2. In the future, you will be more likely to engage in a little “retail therapy” if you have store-specific credit cards in your wallet.
3. You will be sent coupons and special offers that entice you to the store. Ever bought something just to take advantage of a coupon?
4. And, of course, you will pay interest and fees on the credit card.
Suddenly, that $9.30 savings doesn’t seem worth it, does it?
Never Apply for a Retail Store Credit Card
Reason #2: Your credit score might suffer.
I can think of three reasons your credit score might suffer from a store-specific credit card:
1. Keeping these cards active can be tough.
2. You might end up with too many credit cards.
3. You will definitely add a credit inquiry to your credit report.
Let’s start with the first reason: Keeping these cards active.
An important part of learning how to fix credit is to have the right number of credit cards. To earn the highest credit score, you should have between three and five revolving credit cards. And these credit cards should be active.
Credit-scoring bureaus want to know that you can responsibly manage your credit cards. If you let your credit cards go inactive, the bureaus have no idea whether you are able to manage balances and debt. In other words, inactive credit cards do nothing for your credit score.
But keeping a retail store credit card active can be tough. Are you going to buy a lawnmower from Sears each and every month? Are you sure you need a new Gap sweater twelve times a year?
Most likely, you will either keep the card active by making unnecessary purchases (which costs you money), or the card will go inactive. Either way, it’s bad news.
Let’s talk about the second reason a store-specific card might hurt your credit score.
Like I said, the credit-scoring bureaus are the happiest if you have the right number of credit cards. If you do not have at least three credit cards, they don’t have the information they need to make a judgment about whether you are responsible. If you have more than five credit cards, they know that you are in danger of getting in over your head.
Three to five is the sweet spot. So if you are limited to just three to five credit cards, why waste one on a card that will only be accepted by one merchant? You cannot reserve a car using your Banana Republic card, but you can purchase a suit from Banana Republic using a Visa.
Too often, people apply for retail cards each time they are offered a discount. These people must also carry American Express, MasterCard, and Visas for everyday expenses, traveling, and business needs. And they quickly find themselves carrying a lot more than five cards.
Finally, let’s talk about the third reason a retail card could hurt your credit score: credit inquiries. Ten percent of your credit score is based on the number of credit inquiries you have on your credit report in the past year. If you apply for a retail store credit card, your score could drop a few points, and this could cost you a lot of money in interest on future loans and credit cards.
Of course, department stores and banks will never tell you to avoid retail store credit card offers! Be sure to learn more of their secrets by downloading our free ebook: 35 Important Facts the Banks Won’t Tell You About Credit.
Ready to Transfer Credit Card Balances? Read This First!
Offers to transfer credit card balance to a low-interest card might be seductive. I’ll save money and lower my parents, you might think.
Not so fast! Before you transfer a credit card balance, be sure you understand how the process can benefit you or hurt your credit score. That’s right—it could hurt you.
Let’s take a look at how the process of transferring a balance from one credit card to another works. Traditionally, the process begins with a credit card with a large balance or a high interest rate. Once another card offers you an opportunity to transfer your balance to a new card with a lower rate, you may decide to put part or all of your balance on the new card. By doing this, you can pay off the old credit card, secure a new and better interest rate, and possibly enjoy the rewards, options, and specials associated with the new card. However, you should be mindful of two things before taking advantage of this seemingly smart strategy.
Transfer Credit Card Balances? Consideration #1: Pay attention to your credit card balances. It may seem like a straightforward idea to put all your balances on the card with the lowest interest rate, but keep in mind how credit-scoring bureaus come up with their ratings. Thirty percent of your overall credit score is produced by the balance you carry versus your credit limit, or your utilization rate. To keep a solid credit rating, your utilization rate should never be more than 30 percent of your limit. Many people rack up balances in excess of a 30 percent utilization rate after transferring money to new cards, and as a result, their credit score takes a big hit.
In fact, you should always wait until the card is opened to transfer credit card balance. Do not transfer the entirety of your balance while opening the account. Most creditors will decide your limit depending on the amount that you request to transfer. If you transfer $6,000, for instance, the creditor will determine credit limit to be $6,000, giving you a very dangerous utilization rate of 100 percent. The smarter way to proceed is to act cautiously: open the account first and transfer balances from other credit cards only after you know the limit and calculated the utilization rate. Then, only transfer 30 percent.
Transfer Credit Card Balances? Consideration #2: Never open a card just to transfer the balance. Having a ton of credit cards might lower your credit score as the credit bureaus know that you have the opportunity to dig yourself into massive debt and start missing payments. In a perfect world, you would have between three and five credit cards. If you already have five cards, don’t close them (this could also hurt your score), but don’t open new ones either, even if you think you’ll be saving money by transferring balances and lowering interest payments. In fact, you might end up lowering your credit score so much that you pay extra interest payments on all future loans. You should always make sure that all of your credit cards help with an overall credit-building strategy, so never open a card just so you can take advantage of a low introductory rate.
Once you have dodged these pitfalls, you might be ready to transfer credit card balance. As always, though, be sure to thoroughly read all the related fine-print associated with credit card offers. Some cards may have specific restrictions or fees associated with transfers. Making sure that you understand the extra benefits as well as restrictions of new cards could allow you to shrink your balances and perk up your credit score.
Credit Cards and Credit Scores: The Intimate Relationship
Many people wonder about the relationship between credit cards and credit scores. While credit cards can be great tools in enabling you to purchase goods and services without having the cash on hand, they can also present an almost irresistible temptation to spend money you don’t have and mess up your credit score. What you might not realize is that credit cards can be your secret weapon in obtaining an excellent credit score. By understanding the impact your credit cards have on your credit score, you can take charge of your credit cards and leverage this knowledge into a higher credit score.
Credit cards and credit scores go hand-in-hand in several ways. First, take a look at the number of credit cards you own. Credit-scoring bureaus reward consumers the most if they can manage to responsibly balance between three and five credit cards. Credit card companies want to see that you can manage more than one or two credit cards at the same time, so if you have only a couple of cards, you may get a boost by obtaining an extra card or two.
Warning, if you have more than five credit cards, you shouldn’t immediately cancel a bunch of cards. First, this may damage your credit score by reducing the average age of your credit accounts. The length of your credit accounts determines fifteen percent of your credit score, so closing two or three credit card accounts may cause your credit score to drop. Second, you may be able to maintain and increase your credit score even with more five credit cards if you can pay down your balances to as close to zero as possible on any credit cards you rarely use.
Another important part of understanding credit cards and credit scores is the utilization rate. To get the best credit score, you should maintain a utilization rate of 30 percent or less. Your utilization rate is the ratio of your credit card balances against your credit card limits, expressed as a percentage. Therefore, if you have $600 worth of debt and your credit limit stands at $1,000, your utilization rate is 60 percent. Credit-scoring companies will award you a higher credit score with a sub-30 percent utilization rate, so if you can pay down your debt below this threshold, you will likely see a quick boost to your score.
Another way to strengthen the relationship between your credit cards and credit scores is review your credit report. Make sure you are regularly reviewing your credit report to keep track of whether your credit limits have been accurately reported.
If your credit card company reports your limit as $2,000 instead of $4,000, the $1000 balance on your card goes from being an attractive utilization rate to a negative factor that will drag down your credit score. In other words, rather than showing a 25 percent utilization rate, your credit card will show a 50 percent utilization rate. Unfortunately, credit limits are frequently misreported, so this should a mandatory item for you to double-check when you are reviewing your credit report.
One of the advantages of keeping on top of your credit cards and credit scores is being able to save money. Once you’ve built your credit score by using your credit cards wisely, you can flex your financial muscles. Call your credit card companies, point to your steady and responsible behavior, and ask for a lower interest rate.
A Dirty Little Secret that Hurts Credit
People already know that bankruptcies, foreclosures, repossessions, and collections will hurt credit. 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.
HURT CREDIT SECRET #1: 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 credit?
The credit-scoring systems place 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. 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 causes hurt credit.
Are you a victim of this scam? If so, take the following steps:
1. Pull your credit report from www.720ficoscore.com.
2. If the credit card companies are inaccurately reporting any credit limit of yours, immediately begin the process of correcting this mistake.
Student Loans and Credit: 9 Things You Must Know!
What’s the relationship between student loans and credit scores? You might be surprised! In this article, we take a look at the nine things you should know about student loans so that you can build a great credit score.
Nine Things You Should Know About Student Loans and Credit
First a little background. Student loans are unsecured loans (without any collateral backing them) issued to help with the costs of tuition, books, board, and other school-related expenses. As with any other loan, your credit score is deeply impacted by your student loan. When you make your student loan payments on time, your credit score will improve. If your payments are late or if you skip a payment, your score will drop.
Student loans are a great way for young adults to begin the all-important task of showing lenders that they can handle debt. If lenders see that you can make payments on time and in full, your credit score will go up and you will be more likely to get larger loans in the future.
This is important because you will need credit upon graduating from college. Your first employer might run a credit check, assuming that your credit score is a good indication of whether you are responsible or not. And a landlord will definitely run your credit before renting a home to you.
With all this in mind, here are nine things you should know about student loans and credit.
Student Loans and Credit, Fact #1:
When you apply for a student loan, your credit might or might not be pulled. Some lenders do require a credit score, but others do not. If your credit score is pulled, a credit inquiry will be added to your credit report. This might cause your score to drop, but the impact will be minimal.
Student Loans and Credit, Fact #2:
About 30 percent of your credit score is determined by your outstanding debt: the ratio of how much you owe versus how much you have paid. The more you have paid and the less you owe, the better your score. If your payments are being deferred until you have graduated, or if you have deferred payments for another reason, the ratio will not be in your favor, and your score might drop. However, it will start to increase after about six months of timely payments.
Student Loans and Credit, Fact #3:
With this in mind, consider that students who are positioned to pay back their loans before graduating will enjoy a faster ride to good credit. Even though a lot of student loans do not require repayment until you have graduated, your credit score might be higher if you start repaying the loans immediately. Keep in mind that some employers will run a credit check when you apply for your first post-college job, so having a high credit score could behoove you.
Some people have speculated that if borrowers pay back their student loans too fast, they will lose credit points (presumably because the maximum interest on the loan will not be accrued if the loan is paid off early). I think this is a bogus claim. The exact details of credit-scoring formula have not been released, so I cannot definitely confirm this theory one way or another, but I seriously doubt its accuracy. Credit-scoring bureaus are not interested with your creditor’s ability to earn the most interest, but rather with your ability to repay your loan on time. The bureaus want to know that you will pay your debts on time. Paying your student loans sooner rather than later is a wise thing to do because your debt-to-principal ratio will drop and your score should increase.
Student Loans and Credit, Fact #4:
Before you leave college, avail yourself of the opportunity to receive exit counseling, a service most schools offer to prepare their students to repay federal student loans. This counseling can provide you valuable information about your rights and responsibilities and the terms and conditions of your loans.
Student Loans and Credit, Fact #5:
Once you begin repaying your loan, never miss a payment. Here’s something you might not know about student loans and credit: 35 percent of your total credit score will be drawn from your payment history on credit cards and loans.
Student Loans and Credit, Fact #6:
If you cannot make a payment, ask for forbearance, a short-term agreement that allows you to make smaller payments, or no payments at all. Otherwise, you will harm your credit score. Keep in mind that if you do not make payments, interest will continue to accrue and the amount due will grow larger.
Student Loans and Credit, Fact #7:
Keep in touch with your lender. If you are struggling with your payments, never wait until the lender approaches you or until a delinquency notice is logged on your record. Instead, initiate communication with your lender. Talk about forbearance or student loan consolidation.
Student Loans and Credit, Fact #8:
Student loans can never be discharged during bankruptcy.
Student Loans and Credit, Fact #9:
Making regular payments on your student loans is a great way for young adults to begin building their credit score, setting the foundation for better loan terms and lower interest rates on future loans, and saving bundles over the course of a lifetime. But this isn’t enough. As you move on after school, you should try to incorporate different types of credit into your finances while keeping current on your payments. The mix of credit you have makes up 10 percent of your score. The credit scoring bureaus want to see that you can handle a variety of types of loans—from credit cards to student loans to car loans.
Now that you know the nine important facts about student loans and credit, be sure you learn the 35 facts the banks don’t want you to know! These money-saving tips and insider secrets about credit scores can help you save a bundle and position yourself for success.
How Is a Credit Score Calculated?
How is a credit score calculated? This is a question I’m asked often, and the answer is not a simple one. In fact, there are a lot of people who sell something they call a “credit score,” but they are actually selling garbage. This blog clarifies the players, how they work together, and what you can do to make sure that you get your hands on your true credit score.
How Is a Credit Score Calculated? The Players
Let’s start with the three main players:
1. Your creditors,
2. The credit-reporting bureaus, and
3. The credit-scoring formula.
Your creditors are those banks, lending institutions, people, and entities that report to the three credit-reporting bureaus. They consist of:
- Banks and lending institutions that have granted you with a loan or a credit card, or that have considered a loan or credit card application.
- People, entities, or companies that are pursuing you for unpaid debt. If you fail to pay a bill or debt, a creditor will attempt to collect this debt. For instance, you might have a tax lien or a judgment against you. In either case, a creditor will attempt to collect the unpaid money. If you fail to pay a bill, it will be turned over to a collection agency, which will attempt to collect the debt.
It is important to note that the following companies do not report information to the credit-reporting bureaus, unless you fail to pay them bills, in which case they will be turned over for collection and reported to the credit-reporting bureaus:
- Utility companies
- Cell phone companies
- Landlords
Alimony and child support payments are also not reported to the bureaus, unless you fail to pay.
Now let’s talk about the three credit-reporting bureaus: Equifax, TransUnion, and Experian. Your creditors report information to one, two, or all of the credit-reporting bureaus. For instance, your Visa credit card company might report your payment history to Experian and Equifax. A bank that provided you with a small line of credit might report only to TransUnion, whereas your mortgage lender would most likely report to all three.
The credit-reporting bureaus do two primary things:
1. They collect information from your creditors.
2. They report your credit score by applying a credit-scoring formula.
So that brings us to the credit-scoring formula. Your credit score is computed using an intricate formula that considers a variety of factors.
Here is where it gets confusing. The credit-reporting bureaus apply a different credit-scoring formula depending on who is asking for your credit score.
Let’s say that you apply for a rental unit. The landlord is concerned primarily with your history of mortgage payments, as well as any evictions you might have on your record. Now let’s imagine that you also apply for a car loan. The bank considering your car loan is concerned with your history of installment payments and whether you have any repossessions on your record.
Equifax, Experian, and TransUnion know that the landlord and the car company are interested in different things, so they apply a different credit-scoring formula depending on who is asking for your credit score.
Important to note is this: 90 percent of all lenders use a credit-scoring formula called a FICO Score. None of them use something called the Consumer Score. We will discuss this in detail later. Just remember this: Of all the credit scores you can buy, the FICO score is the most important. A consumer score is the least important.
Before we get into that, let’s talk about how the players work together.
How Is a Credit Score Calculated? How the Players Work Together to Determine Your Credit Score
In summary, your creditors report to one, two, or all three of the credit-reporting bureaus. When a person or lender inquires into your credit score, the credit-reporting bureaus determine which credit-scoring formula is most appropriate. They apply the formula, and then report your credit score.
Because not all creditors report to all of the credit-reporting bureaus, the three bureaus do not have identical information. Therefore, if a bank pulls your credit score from the three credit-reporting bureaus, the bank might end up with three different credit scores. Experian might give you a 650 score, TransUnion might determine that your score is 672, and Equifax might determine that your score is 714.
The banker would ignore the high score and the low score, and just take a look at the score that falls in the middle. In this case, the bank would consider the score provided by TransUnion (672) to be your credit score.
How Is a Credit Score Calculated? Getting Your Hands on the Right Score
Remember a few paragraphs ago, when I told you to remember that the FICO score is the most important score, and that the Consumer Score is worthless? Let’s talk about this now.
As I’ve mentioned, the credit-reporting bureaus have a lot of different formulae they can apply to determine your score. They chose the formula based on who is asking for your credit score.
If you pull your own credit report and buy your credit score, most often, the Consumer Score will be applied. This is a generic credit score that no lender, landlord, or employer will ever use. Only the consumer sees a Consumer Score.
In this way, the Consumer Score is worthless. And unfortunately, it is often a lot higher than a FICO score. This means that if you buy your credit score from most places online, you will receive a Consumer Score that gives you an artificial sense of security about your credit score.
Almost all lenders use a FICO score. If you buy your credit score, make sure it is a FICO score so you have an accurate idea of where you stand. A consumer can buy FICO scores from both Equifax and TransUnion at www.720FICOScore.
However, Experian does not sell FICO scores to consumers. If you want to see all three scores, a lender will have to pull your credit score. The benefit of this is that you have all three scores. You can ignore the high score and the low score, knowing that the middle score is the credit score a lender would use to determine your interest rates.
The downside of getting your credit score from a lender is that a hard credit inquiry will be added to your credit report.
How Is a Credit Score Calculated? The Difference Between Credit Scores and Credit Reports
In considering the question, “How is a credit score calculated?” I have spent a lot of time talking about credit scores. I want to make an important note: There’s a difference between a credit score and a credit report. A credit score is the three-digit number that predicts your likelihood of paying your bills on time. A credit report is a listing of all the information that was considered in your credit score.
Once a year, you can get a free annual credit report. If you want to look at your credit report so that you can identify errors, go ahead and download your free annual credit report. However, you should never, never buy a credit score from www.annualcreditreport.com as this site sells consumer scores only. Remember that the only place to get a FICO score is from FICO itself or from your lender.
This concludes my lesson in “How is a credit score calculated?” I know this is a complicated subject, so if you have any questions, be sure to leave them in the comments!
How to Fix a Bad Credit Score the Easy Way
People who have fallen onto tough financial times always want to know how to fix a bad credit score. In their attempt to learn how to build credit, they will spend thousands of dollars on credit repair services that promise to wipe their credit reports clean of all errors. Some people even try to create a new credit identity, as if they can sweep past errors under the rug.
The big secret, though, is that most of these services do not work. At best, these credit “repair” services will only temporarily suppress credit problems by using illegal methods to briefly suspend errors from your report—errors that will resurface only after the company has walked away with your dollars. At worst, they will expose you to lawsuits by using illegal methods of attempting to remove delinquent information from your credit report.
The good news is that there are tons of ways to fix your credit score that are both effective and legal. If you want to learn how to fix a bad credit score, keep these two components in mind:
How to Fix a Bad Credit Score, Rule #1: Be strategic.
As you can tell, I am not a fan of credit repair strategies that purport to increase your credit score by surreptitious methods. However, there are legal and effective strategies you can use to raise your credit score fast:
1. Build your credit score fast by adding yourself as an authorized user to a family member’s credit card, so long as it is in good standing.
2. One of the fastest ways to build credit is to transfer your credit card balances to your spouse.
How to Fix a Bad Credit Score, Rule #2: Focus on current behavior.
Think of it from the credit bureaus’ perspective. Wouldn’t you be much more impressed with someone who positively changed his behavior than someone who tried to weasel out of past mistakes? Instead of arguing with the credit-scoring bureaus about all of your late payments, try taking a few simple but effective ways to let the credit-scoring bureaus know you have changed your habits.
This strategy works because credit-scoring bureaus place more weight on current behavior than on past behavior. If you made a mess of your credit score two years ago, the credit-scoring bureaus will pay less attention to this if you are making smart decisions today. This means that you should:
- Pay your bills on time.
- Keep your credit card balances as low as you can – preferably below 30 percent.
- Keep three to five credit cards active. Use them at least once a month, but pay your balances as much as possible each month.
- Open new lines of credit after a financial disaster, like bankruptcy or foreclosure. The credit-scoring bureaus need proof that you can manage several lines of credit. If you wipe your hands of credit, they will not have this proof, and your credit score will not increase. Your bad credit score will increase if you have between three and five credit cards, as well as an installment loan, all in good standing. Bear in mind that your credit score will initially drop upon opening a new line of credit. But after six months of timely payments, it will begin to increase.
So here’s the big secret: If you want to know how to fix a bad credit score, don’t turn to credit repair companies that make promises that seem too good to be true. Repairing a credit score is simple, but it cannot be achieved with the wave of a wand.
The Fastest Way to Build Credit
Question: What is the fastest way to build credit? I am applying for a business loan, and I need to bump my score up by about 60 points.
Answer: There are a lot of reasons you might want to raise your credit score, and raise it fast. In today’s environment, you might not qualify for a loan if your credit score is not at least 720. About 60 percent of employers run credit checks on potential employees. Landlords won’t rent to people with bad credit. You will pay more in interest if you have bad credit. The list goes on and on …
Fortunately, if you want to learn how to build credit fast, I have a great trick. This works best for married people, but single folks can use it as well. Let’s start by assuming you are married. Later, I will explain how to modify this example if you are single.
The Fastest Way to Build Credit: A Tip for Married People
To build your credit fast, transfer as much of your credit card debt into your spouse’s name. To do this, simply have your spouse “buy” your debt by paying your balance(s) with his or her credit card(s). Assuming you both have individual credit cards, this will cause your score to jump quickly.
You see, the credit-scoring bureaus place a lot of weight on something called a utilization rate. Each of your credit cards has a utilization rate, which is a number that describe how much of your limit you are utilizing. For instance, if a credit card has a $1000 limit and you have a $100 balance, you are utilizing 10 percent of your limit. Your utilization rate, therefore, is 10 percent.
Credit-scoring bureaus respond best if your utilization rate is below 30 percent, so if you want to learn how to fix credit, you should always lower your utilization rate.
Start by transferring balances to your spouse’s credit cards. Of course, this might lower your spouse’s credit score, but you will buy the debt back (thereby increasing your spouse’s score) once you have qualified for the loan.
In short, you will have better loan terms, and your spouse’s score will be lowered only temporarily.
The Fastest Way to Build Credit: A Tip for Single People
If you are single and also want to know the fastest way to build credit, you can modify this tip and use the same strategy with a family member or a loved one. However, be sure to put some structures in place so that your family member/loved one is protected. For instance, you might want to structure a proper contract by hiring a lawyer or using an online service such as Virgin Money. You might also give your family member/loved one collateral. Is your car paid off? Do you have an expensive piece of jewelry? One way or another, be sure that you never jeopardize family relationships just to raise your credit score!
And be sure to download our free ebooks about how to secure home and car loans during this tight lending environment.
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