Page 3 – Improve Your Credit Score, Now!

NOT AVOIDING NEW CREDIT 10%

By being steady with 1-2 or even 3 credit cards, you are working on obtaining 10% of your FICO score. Don’t go switching accounts every month or every other month. Yes, you can switch accounts but once per year is plenty. But if you don’t switch at all, this is better. And if you don’t constantly seek to obtain credit cards or lines of credit, this is what FICO rates as a desirable customer.

In developing your FICO score, 10% of the weight of your score is obtained by analyzing the following:

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
• Number of recent credit card inquiries
• Time since recent account openings, by type of account.
• Time since credit inquiry(s)
• Re-establishment of positive credit history following past payment problems.

1. 35% Payment History
2. 30% Amounts Owed
3. 15% Length of Credit History
4. 10% New Credit

90%

NOT HAVING A MIX OF CREDIT 10%

Having a mix of secured and unsecured debts accounts for 10% of your FICO score. Mortgages and car loans are secured debts. Unsecured debts are credit cards and personal loans. It’s not necessary to have a mortgage to have an excellent FICO score of 700+, but it does help you regarding the mix or types of credit you manage.

In developing your FICO score, 10% of the score is developed by analyzing the mix or types of credit for which you are responsible.

Your Types of Credit Used include the following:

• Number of and presence and prevalence, and recent information on various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

1. 35% Payment History
2. 30% Amounts Owed
3. 15% Length of Credit History
4. 10% New Credit
5. 10% Types of Credit Used

100%

NOT KNOWING THAT YOU SHOULD PROPERLY COMPLETE AN APPLICATION FOR CREDIT

One simple yet very important point that many people don’t take seriously is COMPLETING an application for credit.

How you COMPLETE an application for credit can cause you to be rejected or accepted.

When completing an application for credit, I recommend the following:

1. Honesty. If you have filed for bankruptcy, don’t check off “no”. The application might ask if you have filed for bankruptcy within the last 7 years. Answer it truthfully because you can have a good credit score within 12-24 months after you file for bankruptcy, but if you get caught in a lie even though you have a good credit score, you can be rejected because you lied.
2. Completeness. You must answer all questions and you should not leave any questions unanswered. If the question doesn’t pertain to you, write “N/A” for “not applicable”. Don’t leave it blank.
3. Neatness. Use your best penmanship. Print if necessary. A sloppy handwriting which is nothing more than indecipherable “chicken scratch” will not “win friends and influence people”. A terrible handwriting demonstrates a disregard or indifference to the application and that you aren’t taking it seriously. Whether you are completing the application in long-hand or typing the application, first make a photocopy and do a dry run to see the problems you will encounter.
4. Thoroughness. When the application asks for account numbers, and you don’t have your account numbers, don’t submit your application until you have entered all the account numbers.

Your credit application is yourself and you want to make the best impression by being honest, complete, thorough and neat. People who have to review your credit application appreciate such applications and by doing it correctly the first time, this will speed-up the decision making process and does gain you some intangible positive points.

NOT KNOWING WHAT HURTS AND WHAT DOESN’T HURT YOUR CREDIT SCORE

On your credit report there’s a section called, “Inquiries.” And when you have too many inquiries it will hurt or lower your credit score.

Sometimes you walk into a shopping mall and every retailer is offering you a credit card with 10-20% off the purchase price. If you have many inquiries within a short period of time, this will lower or reduce your credit score.

It’s a better strategy to gradually acquire any credit cards and not to try to obtain them all in one month’s time. If you applied for new credit every 3-4 months, and hopefully are approved, you’ll have enough credit cards because you only need 3-4 credit cards, at the most.

Now there are inquiries on your credit report where your present creditors review your credit report and these don’t adversely affect your credit score and this can be called a “soft inquiry.” But when you apply for “new credit” and you are rejected for the new credit, this acts like the dropping of an atomic bomb on your credit score and is called a “hard inquiry.”

NOT KNOWING IF YOUR SECURED CREDIT CARD IS REPORTED AS ‘SECURED’ OR ‘UNSECURED’

Many people in order to jump start their credit score, obtain a secured credit card versus an unsecured credit card. First, what is a secured credit card? A secured credit card is one in which there is collateral or a deposit is posted as security that in the event you don’t pay, the creditor can collect against your deposit. For example, if you deposit $1,000 and offer a $1,000 as collateral, the creditor will give you a credit card with a line of credit for $1,000.

Many companies who offer secured credit cards don’t report to the Big 3 Credit Bureaus that you have a secured credit card versus an unsecured credit card where you haven’t made any deposit to receive a credit card. I have read where it doesn’t affect your FICO score if the credit card is reported as secured or unsecured. I tell clients though that if I have my druthers, I would want it reported as an unsecured card. But you don’t have to reject out of hand a credit card if it reports as being a secured credit card.

Simply ask the secured credit card how they report to the credit bureaus and I would favor a credit card that didn’t report it as a secured card.

NOT SHOPPING FOR A SECURED CREDIT CARD TO JUMP START YOUR CREDIT SCORE

If you go to WWW.BANKRATE.COM you’ll find information on secured credit cards as follows (since this information fluctuates, I’d advise you to review this website if you find problems with this chart – it could be outdated by the time you read it):

At the present time our research regarding secured cards indicates the following:

NATIONAL CITY BANK – (800) 774-2424

1. 14.99%
2. $250.00 down as a minimum – maximum $2,500.00
3. $36.00 annual fee; payable monthly @ $3.00 per month

AMALGAMATED BANK OF CHICAGO: (800) 723-0303

1. 12.75%
2. $500 down as a minimum
3. A Classic Card @ 12.75% with $500-$5,000 down
4. A Gold Card @ 9.75% with $5,000-$15,000 down

ZION’S BANK: (800) 789-2265

1. 13%
2. $300 minimum
3. Discharged from Bankruptcy 6 months
4. No annual fee
5. 3 years before unsecured status

WELLS FARGO (800) 642-4720

1. Available after one year of filing bankruptcy and while still in a Chapter 13
2. $300 minimum
3. Reports as a secured card
4. $18 annual fee
5. Optional Rewards

TIP: Some credit card companies give you your credit score for free on their website. I would check their websites and look to see if you get a free credit score report.

NOT HAVING A MAJOR CREDIT CARD

It’s best to have at least one MAJOR credit card for a long period of time. MAJOR credit cards help your credit score. It’s even better to have several MAJOR credit cards over a long period of time. The MAJOR cards are: Master Charge, Visa, American Express, and Discover.

If your credit union offers a credit card, please check whether or not the payment history is reported to the Big 3 Credit Bureaus. You would want them to report to at least one credit bureau. If it’s not reported, then it’s a secondary source for a credit score and is not a factor in the major FICO score.

NOT KNOWING THAT YOU DON’T HAVE TO PAY-OFF A MORTGAGE OR CAR LOAN EARLY

The longer you have an installment account for a car loan or mortgage and make consistent payments, the more this improves your credit score.

However, since first mortgages are 30 year installment loans, I don’t see any problem if you try to save money by paying it off early because most people can’t pay off their first mortgages in less than 15 years and certainly 15 years of consistent payments is impressive and if you do succeed in paying it off early and saving $100,000, I am confident that your credit score can’t possibly suffer.

The same with a car loan which is usually for 5 years. If you pay it off in 4 years by paying an extra $100 per month, and assuming you are always, but always paying ahead of the monthly due date, you will improve your credit score and save money.

If you make your mortgage payment for 30 years and pay on car loans for 5 years, as long as you are paying every month in a timely manner, it’s not necessary for a good credit score that you make extra payments on the debt in order to retire it early.

NOT KNOWING WHAT IS A ‘GOOD CREDIT SCORE’

Your FICO score ranges from 0-800+ and the statistical breakdown for the population is as follows:

1. 1% of the population has a score up to 499
2. 5% of the population has a score of 500-549
3. 8% of the population has a score of 550-599
4. 12% of the population has a score of 600-649
5. 16% of the population has a score of 650-699
6. 19% of the population has a score of 700-749
7. 28% of the population has a score of 750-799
8. 11% of the population has a score of 800+

Most credit lenders have 650 as a starting score which they believe is strong.

Once you attain a FICO score of 740, there is no difference for the most part in the interest rate that you will be offered even if you have a 750 or 790 FICO score. So, if you have a 750 FICO score, do not panic. It should not be of any concern. Keep doing the things you have been doing and perhaps you might look at the comments from FICO and try to implement them but do it gradually. You have been accepted into the Credit Hall of Fame.

NOT APPRECIATING THE DIFFERENCE BETWEEN A ‘HOME LINE OF CREDIT’ AND A ‘HOME INSTALLMENT LOAN’ CAN LOWER YOUR CREDIT SCORE

Many times, a client comes to my office and tells me that they do not have a second mortgage, but they have a “home equity line of credit.” In every case, the “home equity line of credit” is really a second mortgage but it is not called a second mortgage by the consumer; they insist that it is a home equity line of credit. If the creditor files a document on the land records which evidences the debt, which they always do, then it is at least a secured loan and there is not much difference between a secured loan, a mortgage, and a home equity line of credit.

What is very important here is how the debt is reported to the credit bureaus. If it’s reported as a “revolving line of credit,” which it is, then since the debt on the loan is maxed out, this will cause FICO to reduce your credit score. However, if it is an “installment loan,” it won’t reduce your credit score. Before you take out the loan, ask and know how it will be reported. A revolving line of credit like this can and will reduce your credit score even when you are making all your payments and paying them promptly. But if it is an installment loan, then it’s treated like a car loan or mortgage for FICO purposes.

What if you discover that you have a home equity line of credit or a revolving line of credit on what you thought was a second mortgage or thought it did not affect your credit score? If you can, refinance it into one mortgage or pay it off.

The banks know that people do not like the word mortgage because “mort” is “death” and in Medieval times it was a payment until you died. And the bank’s marketing department says, “Put your equity to work” and get a “line of credit.” This sounds so much better than a mortgage. It is like a Halloween scare word. People pull back from it. But a line of credit is so much smoother and inviting. A credit card is a line of credit, and the bank wants you to turn your house into an ATM and just start borrowing against your house. This is not a good idea.

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