Author Topic: How To Increase Your Credit Score  (Read 5279 times)

Offline Mark Austin

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How To Increase Your Credit Score
« on: September 08, 2008, 03:38:57 PM »
How To Increase Your Credit Score

This isn't directly related to internet marketing, but it is an important topic none the less.

If you ever want to borrow money, whether it's for small everyday items via a credit card or for larger loans like a mortgage, you need to know your credit score  -- it's vital information. Most people have no idea what their credit score might be, and this handicaps them in many ways.

If you've tried to get a loan, and have been refused, you will have heard the term "credit score". Getting the loan you want, and beyond that, living the sane financial life begins with understanding your credit score. Once you know your credit score, if it's too low, you can begin to rebuild it.

You have a legal right to know your credit score, but most people first hear the term "credit score" when they've been refused for a loan. Even if you've NEVER been refused, you need to keep an eye on your credit score because your score can be filled with mistakes, and correcting a mass of mistakes is a huge job. If you keep an annual check of your credit score, you can correct any errors immediately.

If you've been refused credit because of your credit score the first step in building (or rebuilding) your credit score is to find out what YOUR credit score is NOW. You may be depressed and anxious, however you can find out, and this knowledge is power. Even if you're in debt, and you know what it's like to dread a phone call, or a knock on the door, you need to take control of your credit score.

Even if your situation is so bad that you don't even open your bills, you shove them into a drawer so that you won't have to think about them, you can take control. With a bad credit score, getting a loan is almost impossible until you rebuild your credit score. This can be done, so don't despair, when you find out what your score is.

Look on your credit score as your "how I handle money" reputation: with a few simple skills, you can build a good credit score, as long as you make it a priority in your life. As you rebuild your credit score your money-reputation will change, and before too long you will have a good credit score.

A good credit score means that you're a good manager of money. You've proved that you can handle the money you owe, and pay your debts. With a good credit score you won't have problems when it comes to making future purchases, whether those purchases are for big-ticket items or for small. You start to build your credit score by knowing what your credit score is. Once you know, no matter how small it is, you know where you are, and you can begin to rebuild your score.

A credit score is a way for financial institutions to manage their risk. A bank, or other lending institution, must make a profit when they lend their money – in essence, they're selling the money they have to you, and they want to make a profit to satisfy their shareholders. Therefore, you will repay interest on money lent to you, which is the lender's profit. If you can't or won't repay the money, then the lender has made a loss. Your credit score helps lenders assess your ability to repay, with interest, and money which is lent to you for any purpose.

How credit scores are calculated

Your credit score is a picture of your credit history. It's created by a computer statistical model, and if you have a low score, it can mean that you won't be able to get credit, whether in the form of a credit card, or a loan. Or, if you are given credit with a low score, then it will be at a higher rate of interest.

Your credit score is sometimes known as your FICO score, (which rhymes with 'psycho') after Fair, Isaac & Co, the company which creates credit score computer models. These models are mathematical models contained in computer programs. Information is fed into them; this information may contain data about the state of the economy, consumer repayment behavior, wages, and interest rates, and so on, and the models are created out of all these separate pieces of information.

In a nutshell, FICO is a way for lenders to calculate your creditworthiness. FICO scores are measured using data like bill-payment history, the kinds and number of finance  accounts you have, and your outstanding debts. FICO scores are usually between 300 and 850, and the lower your score, the higher the lender's risk.

These computer models which calculate the scores are closely guarded secrets, because a lot of research goes into developing them. When the models are applied to a an applicant's name, a credit score for that applicant is returned. Credit scores are returned as a number, and the numbers can range from 300 to 900. An average score is around 750. When calculated with the FICO model, when your credit score goes down, your risk of defaulting on your loans increases. The correlation between a low credit score, and high default rates, is well understood in the credit industry.

In the USA, there are three major credit reporting agencies, Equifax, Experian, and Trans Union. When you apply for a loan, the lender will contact these agencies and pay a fee to be given your FICO score as calculated by a financial product sold by that agency. Because different information goes into compiling the scores, these scores are sold as financial products, under various trademarks. For example, example Beacon, Beacon 96 and the Pinnacle are products sold by Equifax.

Major credit reporting agencies
Equifax: http://www.equifax.com/
Experian: http://www.experian.com/
Trans Union: http://www.transunion.com/index.jsp

In addition to using report information from agencies like Equifax, Experian, and Trans Union, all major lenders have their own in-house ways of generating FICO scores.

The FICO computer statistical models are regulated. Because FICO scores are created using statistical probabilities, companies may be tempted to use statistics which are unfair to minority or other groups – women and racial minorities for example. If companies were allowed to do this, it would put entire segments of the population at a huge disadvantage.

Therefore, to level the playing field, the government has decided that companies cannot apply statistical probabilities in any way that they wish. Race, for example, can’t be added to the statistical model. The Equal Credit Opportunity Act makes it illegal to use a credit scoring model with illegal bias taking into account factors like race, color, religion, country of origin, sex, or marital status. In addition, anyone who applies for a credit and is refused must be given a reason, and the reasons that the credit was denied must be exact. No one can deny you credit by saying: "Your score's too low."

How your FICO scores are calculated ...

Of course there's no way of using a similar computer model as that which is used by FICO because the model is a secret, but a rough guide is useful in that it will tell you what is considered important when it comes to credit scores.

Here's a rough guide to how FICO scores are calculated:
Your payment history: 35%
How you pay your bills is important. Paying bills late, having an account sent to a collection agency, or a declaration of bankruptcy will adversely affect your FICO score. The further back in time the problem occurred, the less weight it's given. This means that if you paid your electric bill late a month ago, it's worse than if you declared bankruptcy six years ago. What happened a month ago indicates your current financial situation.

Your outstanding debt: 30%
When you're applying for more credit, the amount of money you currently owe is important. If you have several credit cards on which you're close to the limit, this adversely affects the score. Low balances on your cards helps: it shows that you're managing your money.

The length of your credit history: 5%
The longer a credit history you have, which shows prompt repayments of your bills and that you've been paying off your loans, the better.

Recent inquiries on your report: 10%
If you ask a company to lend you money, they want to know who else you've asked.
If you have recently applied for many new accounts, that may negatively affect your score. Promotional inquiries don't count – those inquiries you make because you were offered an inducement or something free, are not calculated as other inquiries are. After all, you may just have wanted information and the freebie.

The kinds of credit that you use: 10%
What kinds of credit do you have? Any loans that you have from finance companies usually lower your credit score. This is because finance companies charge higher rates of interest, and people don't get loans from finance companies if they can get a cheaper interest rate from a bank.

If your credit score is low, you'll have problems getting a loan
If your credit score is much lower than the average of 750, you'll have challenges convincing anyone to give you a loan at an affordable rate – or even any loan at all.

Your credit history can vary from bureau to bureau, and so can your credit scores
The are three main credit bureaus, Equifax, Experian, and TransUnion are separate companies and they're in competition with each other, so they're trying to generate the most accurate credit scores. This means that the scores the companies give you may vary, often widely, depending on how they've applied the FICO information. You may have a high score with one and a low credit score with another, and you can have a good credit history with one bureau and a messy one another bureau.

There shouldn't be a big difference in your credit scores with each of the bureaus, but sometimes your score can vary by up to 100 points. Therefore someone who's working out whether they should give you credit will use the middle score. This won’t help you much if all three scores are low, or if two are low, and one is 750 – because the middle score will be used. Usually someone with good credit will have scores like, 695, 710 and 750.

How to Get Your Credit Score

You can apply for a report of your FICO score at various companies, or estimate own  FICO scores by entering some information. Visit these sites:

FICO Score Estimator: http://www.bankrate.com/brm/fico/calc.asp
myFICO: http://www.myfico.com/
Equifax: http://www.equifax.com/
ScorePower: http://www.scorepower.com/

You're entitled to one free report, each 12 months. You don't need to pay to keep an eye on your credit rating, you're entitled to a free report, from each of the major credit reporting agencies, once every 12 months. It's worth taking advantage of this every year, because it lets you keep an eye on your credit. Mistakes can be made, and the sooner you catch them, the better.

Why your credit score is what it is

What causes your score to be high or low? Your credit scored is revealed in a file called a credit report, which is based on information which is held about you. In this chapter we'll look at some of the reasons your credit score is what it is. You'll be pleased to know that once you have your credit reports from the major agencies, and you find inaccuracies, you can do a lot to improve the scores in a short time, once you correct the inaccuracies and get the credit reporting agencies to update their records.

What’s included in your credit report?

Your credit report is a file which is made up of information which has been submitted about you. Usually the information is submitted to a credit agency by people like your creditors (those to whom you owe money), by the courts, and by debt collection agencies. To round out the file, information is gathered from other public records – land you own, cars you own, and do on. All the information on your report stays there, and negative notations on the report can affect your ability to get credit for years. Most information stays on your report for seven years; bankruptcies stay for ten years.

Your credit report contains: personal information, public record information, collection reports, your credit history, what you currently owe, credit enquiries made about you, and your credit score. Your credit score is arrived at from the compilation of all this information, when the information is given weighing factors. The lower the score, the greater the risk you're assumed to be for anyone who is lending you money.

Is the report accurate? It may not be! Your credit report contains various kinds of information, and you should check it all. Mistakes can be made anywhere – you may find that a person with a similar name and the same birth date has information that has been mixed with yours.

There are four kinds of data you need to check in your credit report:

* Identifying information, which includes your full name, your current address and previous addresses, your Social Security Number (SSN), date and year you were born, your current employer and previous employer, and if married your spouse's name;

* Credit information, which includes your credit accounts and loans from organizations like banks, finance companies, retailers, credit card companies and other lenders;

* Public record information includes any information about you which is contained in state and county court records, like bankruptcies, liens, and monetary judgements.

*Enquiries, which includes and applications that you've made for credit.

The information in your credit reports comes from the companies that you do business with. Therefore it's likely that there will be errors, and you shouldn't be surprised or upset when you find them. Any errors in your credit reports can be fixed – without bothering to pay so-called "credit repair" companies.

Your first step is to read ALL the information in the credit report, and underline any errors and inaccuracies. Underline them all – even trivial errors, such as a wrong address, can be interlinked with other information held by other agencies and may lower your credit score.

Correcting the errors in your credit report

When you get your credit reports each year, you WILL find errors. Don't be concerned about them.

Here's how to correct errors step by step.

1. Make a photocopy of the report and underline every error that you find.

2. Write a letter to the credit agency which sent you the report (the address will be on the report), pointing out the errors, and give the correct information. If you've got receipts and other documents to support your arguments, make COPIES of these documents and send the supporting documents along too.

3. When you've gathered everything, send the material by certified mail, with a signature required, so you can be sure that your package arrived at the agency and was received.

The credit agency will begin an investigation, to verify that the information that you sent them is correct. When the investigation is completed, the agency must send you a free copy of your report if changes were made. Also, if inaccuracies were made and these were corrected, you can ask that an updated and corrected copy of the report be sent to everyone who has received a copy of the incorrect report within the last six months. 

4. If you've been refused credit as the result of a credit report that has errors, you can send a letter of dispute (similar to the one that you send to the credit agency) to the company which refused to give you credit, and send along copies of documents which support your case.

If the agency says the report is accurate, and inaccuracies aren't corrected
Occasionally an agency will refuse to correct inaccuracies. You'll be told that their investigation has revealed no discrepancies. At this stage, you can ask for the name and the contact details of the investigator who compiled the report. You're also entitled to ask for a second investigation.

If the agency maintains, even after a second investigation, that the report is accurate, and you're sure that it isn't, you can ask that a 20-word (100 character) explanation be placed next to each inaccuracy. For example: "This information is disputed as inaccurate", "subject states invoice paid in full", etc.

If the agency won’t correct an item, and you want it corrected – without explanation
What if you know that an item in the report is wrong, you have the documentation to back it up, and the agency still refuses to correct it, and you don't want the explanation, you want the item corrected? Sometimes agencies will simply refuse to correct an error.

In this case, persist. You'll need to run your own investigation. You can approach third parties who made the report to the credit agency – someone who says you defaulted on a loan, or a bank which states that you were refused credit. This may take some investigation, especially if the incident occurred several years ago. Companies go out of business, the people you dealt with at the time go on to other employment, and records become lost.

Keep copies of all letters you write, and all responses you receive. This will be useful if you're applying for a loan even before the error is corrected – you can show that you're seriously trying to get the mistake corrected. Be completely open about the error on your credit report to the person to whom you're applying for a loan.

Techniques to increase your credit score

Now we'll look at ways in which you can boost your credit score within six months. Using these few simple techniques, you can build an enviable credit score over time. The sooner you start to do this the better, especially if you're looking to buy a home.

Get your credit reports and make sure that they're accurate. The first step is to get a credit report from all three of the major credit reporting agencies. The first step is simple, and we covered how to remove inaccuracies in the previous chapter. Make sure that you do this, even as you're working on improving your credit score.

Apply for credit cards and make repayments. How many credit cards do you have? If you have a dozen, please close as many as possible. The more credit lines you have open, the more it will hurt your credit score. Aim to have a maximum of three to six credit cards at any one time, and aim to use only about 30 per cent of your available credit on a card at any one time. All the cards you keep cards should fit your financial goals. Credit cards are not free money – you're charged for each and every card you own, even if you pay them off regularly.

If you have many cards, begin to pay them off, every month. Ideally, you will pay off every card you have every month. If you're carrying a lot of credit card debt, this will not be possible for you. However, create a budget now, and begin a schedule of regular payments, so that you clear all your credit card debt. Once your debt is cleared, you can begin to use your cards strategically. The fact that you're making regular payments on your cards and are whittling down your debt will show up on your credit report, and you will get credit for this. In the meantime – don't use your cards to make additional purchases: your aim is to pay off your debt.

If you're someone who's always paid their way, and have never applied for a credit card, you may think that this will help your credit score, but unfortunately it won't. You need to show that you’re a good money manager: that you stay within your budget, keep track of all your bills, and pay all your bills promptly. If you've never had a credit card, think about which cards would be most useful, and apply for two cards. Make a small purchase on each card every month, and pay the card every month. These payments will show on your credit report, and they'll begin to increase your credit score.

Pay your bills promptly via online banking. Apply for an online banking account, and take advantage of the ease of online banking to pay your bills on time – as soon as your bills come in, you can schedule them to be paid. In addition, you can schedule recurring bills. With your bills scheduled and paid automatically, you won’t forget to pay them. The speed at which you clear your bills makes yup 35% of your FICO score, so bill payment is important.

Apply to increase your credit limits on your card or cards. Your credit report should show a healthy mix of credit cards and loans, as well as prompt bill payment. Avoid maxing out your credit cards, or even coming close to it. Apply to increase the credit limit on your cards, but don't use this extra credit. If your limit is $5000 and you owe $4000 on the card, this gives you a worse credit score than if you owe $4000 and your credit limit is $8000.

However, don't apply for more than one card at a time – applying for many cards at once raises questions. Your aim is always to have more credit available to you than you're currently using.

Repairing your credit

Now we'll look at ways in which you can fix problems with your previous handling of money. If you're wondering can you "repair your credit"? The answer is both Yes, and No. Your credit score is your history of how you handle money, so you can't change the past. You can't erase mistakes that you've made in handling your money. You can however, start to take actions NOW which will improve your credit score in a short time. There's a real industry to help you improve your credit score, but just like anything else that seems too good to be true, the idea that you can change the past is a scam.

Beware the "credit repair" scammers. Credit repair has become a million-dollar industry. Unfortunately, the industry is plagued with scammers, with officials estimating that up to two million Americans have been ripped off by phoney "credit repair" schemes. In 2005 the FTC started  "Project Credit Despair," which is a crackdown on scammers. The fact is that you can do all the credit repair that is possible yourself, starting by using the information in our previous chapters.

Signs of a  credit repair scam ... Check out any company you want to deal with your local Better Business Bureau, and If you're tempted by an ad for credit repair, there are warning signs that the company is probably bogus:

•   The company asks for money up front;

•   The company tells you that it can remove information from your credit reports and can clean up your report within a few months; and

•   The company suggests that you create a new "credit identity" by creating a new personal identity by illegal methods.

For the facts on how to choose a credit counsellor, go to http://www.ftc.gov/bcp/conline/pubs/credit/fiscal.htm.

Rebuilding your credit after bankruptcy – techniques to use

After you've been discharged from bankruptcy, you can begin to rebuild your credit score. This is not difficult. Yes, the bankruptcy will still be on your record, but what counts is how you pay your bills and manage your money post-bankruptcy.

Here are some easy techniques to use to start rebuilding your credit scores:

1. Apply for a credit card, and use it to buy small items. Pay off the card account every month, and don't use all the credit on the card. Paying the card each month begins to build a history of payment;

2. Start a savings account and begin to built it. Add as much to your savings account as you can, regularly, even if the amounts you add to the savings account each month are small. When you apply for a car loan or for a mortgage, the regular additions to your savings show that you can save money. If you can, have a garage sale, or get a second job, so that you can increase your cash assets;

3. Pay ALL your bills on time. Future creditors will understand your bankruptcy. However, if you're slow paying your bills after your bankruptcy, creditors will take a dim view, because this suggests underlying problems which make you a poor credit risk in the future. Therefore, pay all your bills before they're due. Establish an online bank account, and have your regular bills scheduled for payment, so that they money is just taken out of the account, and you don't have to remember to pay them.

4. After six months, apply for another credit card. Use the same techniques that you use with the first card. Pay off the amount on the card each month, and never get close to your credit limit on the card; and

5. With several months of successful payments behind you, apply for a loan for a car, or for another big-budget item that you need. Note, even if you can afford to pay cash for the item (such as furniture), apply for a loan. Your aim is to show prompt payment of another kind of credit – a loan.

At the end of 12 months, you will have established that you have good money-management abilities post-bankruptcy. Keep up the pattern that you've set. You've made a good start at rehabilitating yourself, and you're now a much more skilled money manager.

Creating a budget, and living well

Do you have a household budget? Budgeting is a skill you can learn. Once learned, you will never be anxious about money again. You will know exactly how much money you have coming in, and where your money is going.

The key to building your credit score is managing your money, and no matter how much or how little money you have, you need to manage that money by creating a BUDGET. Although many people shy away from creating a budget, you can create a budget to live within your means, and live extremely well. If you've never created a budget, a financial planner will help you to set one up. (You can find financial planners in the phone book; your accountant can also help you with this.)

First: your income -- find out what's going out, and match it to what's coming in
Your budget doesn’t have to be complicated. It's a tool to track your money, so that you know how much money is coming in, how much you’re spending, and it helps you to grow your savings.

Here are easy steps to setting up a budget:

1. Get an inexpensive money management program or set up a spreadsheet
If you look at shareware sites like Cnet Download.com at http://www.download.com/, you'll find many inexpensive money-management programs like AceMoney at http://www.mechcad.net/products/acemoney/ which you can trial for free, and pay for only if they meet your needs.

 If you have a spreadsheet like Microsoft Excel on your computer, you can do your calculations on the spreadsheet.

Money management programs help you to create a budget step by step. If you're using a spreadsheet, your first step is to enter your income. If you have two pay periods each month, enter those into the Income worksheet.

Create a separate worksheet in the file for your expenses. Make a list of expenses in a column 1: rent or mortgage, utility bills, phone, clothes, car payment, car insurance, dining out, entertainment, sport, food – and so on. In another column, put 1 or 2. In this column, you'll put which pay check the money for the budgeted item will come from – the first pay period in the month, or the second. Then, as you pay items, check them off your budget, and enter the amount that you paid.

You'll find that setting up your budget takes much more time than using it – that's why having a program which does a lot of the setup for you is handy, because all the basics are done for you.

Use an envelope system for budget items. For periodic bills, you need a way to take money from each pay check, and keep the money until the bill arrives. The easiest way is to use envelopes. You can use several plain white letter envelopes, or a large manila envelope with the amounts written on it for each item you're saving for. When you get your pay check, put the money for the periodic bill into the envelope or envelopes.

You can also use the envelope system when you're saving for an item. Let's say you want to buy a new home theatre system, or a new computer system. Each pay day, put some money into the "new computer system" envelope.

Don't like envelopes? Use an online savings account. One of the easiest ways to save money for periodic bills and for special items is to use an online savings account with a company like ING Direct at http://home.ingdirect.com/

You can set up accounts to save, and because you can't get at your money instantly – it can take up to four days – you won't use the money for impulse purchases. It's as if the money doesn't exist. But of course it does, and when a bill comes in, or you've saved enough for new bedroom furniture, you can use the money.

It will take time for your budget to become a habit. When you first set up a budget – for the first six months at least, you'll feel a little uncomfortable. There will be items that you forgot to budget for, and this is completely normal. Just add them to your budget. However, as the weeks pass, your budget will start to become "normal", and you will be amazed and pleased at the benefits. You will start to be confident in your handling of your finances.

2. Enter a SAVINGS item into your budget. One of the first items to enter on into your budget is a SAVINGS target. Aim to save out of each pay check, even if the amount is small -- $10 per pay check, for example.

What if you have NO money to budget for savings, every cent that you have coming in is already accounted for in your budget, and there's no extra at all? The key here is not to think of your savings as an extra, but as an essential. In the next section we'll look at ways in which you can be more frugal, and save money on your everyday items, like food and clothing.

What's important is that you begin to build a habit of saving – no matter how little money you have, savings should always be a feature of your budget.

3. Keep your receipts and track your spending. To make your budget system work for you, you need to keep your receipts. Get into the habit of asking for receipts for everything that you buy. For small items like a cup of coffee or a newspaper, enter the items onto an index card, and transfer the items to your finance program when you get home. This will enable you to track your spending.

The big benefit of tracking your spending is that you will see easy ways in which you can save money. For example, you may know that your company allows you to claim expenses for items like uniforms and training materials, but you may find out that you can claim other expenses too – such as for meals when you work overtime or on the weekends. Until you start to track where your money goes, your money has a way of leaking out. You can plug those leaks.

Where can you save money?

When you start to track your spending, you will be amazed at the money which just seems to disappear, and you'll want to save money, because it helps your savings account to grow faster. You'll be inspired to save for big ticket items like an overseas holiday, and you'll look for ways to save money, while still enjoying the same lifestyle.
 
It can be a lot of fun to be frugal. With clever shopping, you can save money on your food, clothing, health care and other essentials like insurance for your household contents and vehicles.
There are many online resources to help you to save money, here's a brief selection:

Frugal Fun: http://www.frugalfun.com/
All Things Frugal: http://www.allthingsfrugal.com/
The Frugal Life: http://www.thefrugallife.com/

Saving to invest ... let your money make money for you

As you watch your savings grow, month by month, you will start to look for investment opportunities. You could consider:

•   An investment property. It's almost impossible to lose money when you buy land or a house. Your investment will keep increasing in value throughout the years to come. Yes, you may have to borrow to buy the property, but a great credit score will make it easy to get a mortgage on your investment;

•   The stock market. You can lose money on the stock market if you become interested in playing the market. Invest your hard-saved money in shares which are rock-solid.

For any investment option, you need ADVICE. Be prepared to pay for unbiased advice, and do research on your own for investments which provide good returns, but are low risk.

What's next for you?

I hope that you've found this guide to enhancing your credit score useful. You now have all the information you need to build a great credit score, and get all the credit you need.







“Keep away from people who try to belittle your ambitions. Small people always do that,
but the really great makes you feel that you, too, can become great.”
~ Mark Twain

attagirl

  • Guest
Re: How To Increase Your Credit Score
« Reply #1 on: October 06, 2008, 05:41:18 PM »
Great information, once again. I would expect no less. I really enjoyed the section on rebuilding your credit after bankruptcy. I think that some of those ideas can also be used while establishing credit for the first time and even for those who need to improve their credit rating.