Your Secret Weapon.

A Secret Weapon For Your Credit Score.

 

When you read the words, secret weapon, what did you think of? Are you picturing life or death, drastic measures utilized only as a last resort? Are you envisioning an atomic bomb that the government has been stashing for an emergency response that will unleash lethal doom upon an entire country? Perhaps some type of super soldier that was genetically mutated for destruction in an underground lab? If any of these scenarios came to mind, you need to calm the hell down and lower your thrill expectations for this article before you continue reading. This is about CREDIT, after all. So pop a caffeine tablet and keep up! I'm not here to reveal a literal secret weapon to use against the evil credit bureaus. I'm here to point out the metaphorical secret weapon that may already be in your wallet! Almost, sort of, just as exciting!

That's right! Credit cards! Who would have thought, right? As a credit adviser, the most common misconception I see is that credit cards are of the devil. They have such a bad reputation when it comes to finances and credit. Why is that? Let's take a look into the mind of a 'creditcardaphobic' . . .

I imagine the trauma would read something like this:

Joe is having some financial difficulties, so he applies for a credit card with a limit of $1,000.00. Because his credit score is 800 points, he's approved!

Wow, Joe looks excited. Poor, naive Joe.

Joe maxes out the card, maybe even spends more than the limit and accrues some overdraft fees. He's running low on money again, so he misses a couple payments. Eventually, the financial burden is too much to handle and he can't pay it off at all. After the bank is tired of trying to collect from Joe, they file the amount that he owes them as a tax write-off and sells the account to a collection agency. The agency hassles Joe by phone and written mail and finally agrees to accept his settlement offer (when he pays less than the amount they are trying to collect) and that's the end of it. After Joe pays the settlement, his credit score has plummeted to 550 points. That one credit card has drastically affected Joe's credit rating and in turn, his life. How? Why are the effects so much heavier than every other line of credit?

I'll tell you why, but first you must know how your score is calculated. Your credit profile is divided into 5 categories in order to calculate your score. It's crucial to monitor and care for each category in order to obtain the highest score possible. Those categories are:

Think of school. You take multiple classes, earn a grade in each class, and your grade point average (or GPA) is generated. Same basic concept. The reason credit cards can make such a drastic difference in your credit score is because each card impacts every single category. Monthly.

Let's start with the first and most important category: Payment History. This “class” makes up 35% of your credit rating. When Joe started missing his monthly payments, his “grade” in Payment History decreased. Not only did it affect the category, but each late payment left a negative mark on his credit reports, resulting in a score drop each time another was applied. Those negative marks are considered delinquencies and each one can remain on his reports for up to 7 years from the date he was reported as late.

Moving on to the second most important category, Amounts Owed, which makes up 30% of your credit score and is based around two words: utilization ratios. I will probably mention or stress the importance of utilization ratios in every post. Learn them, live them, love them. Your utilization ratios are how much you owe on a credit card compared to it's overall limit. Bottom line is if you're spending more than 50% of your credit card limit, then you're harming your score. Most banks, credit unions, and credit card companies report to the bureaus on the same day every month. For every month that Joe was spending more than 50% of his limit, the credit bureaus knew it, and his score began to drop. Quickly.

The third category is Credit Length and it makes up 15% of your credit score. This one is pretty self explanatory. This category analyzes how long your credit accounts have been open. The longer an account is open, the better it is for your score. When Joe opened a new account, the card began to affect this category positively. When Joe couldn't maintain the card and the account was closed, not only did his credit length stop growing, but his score took a big hit just for closing out an account.

New Credit makes up 10% of your score. This category is impacted by the number of times you apply for credit. Each time you apply, whether you're approved or denied, a “hard inquiry” is placed on at least one of your reports. You probably know that each hard inquiry takes a couple points off of your credit rating, but if you're approved, those points can easily be recovered with the line of credit that is now helping you're score if you use it responsibly. When Joe applied for a credit card, the inquiry hurt his score. Instead of making up for the lost points, he abused the credit card and his score only continued to decrease.

Last and definitely least, is Credit Mix, which contributes to 10% of the score. While this category impacts credit scoring relatively less than other factors, it remains one piece of the puzzle that shouldn't be overlooked. Your grade in this category is based on your mix of credit, surprisingly enough. Different lenders and bureaus like to see that you're knowledgeable in different areas of the credit industry. Having a mix of revolving and installment accounts will help build your credit score. When Joe closed his only credit account, he removed the only contribution to this “class” and earned himself a failing grade.

As you can see, Joe's bad experience with his credit card affected each category, but the consequences didn't end there! When Joe's bank filed the amount that he owed as a tax write-off, a “charge off” was applied to his credit reports. A charge off is considered a delinquency or a negative item – like a late payment – that hurts the score when it is applied. Each delinquency may remain on the reports for up to 7 years! After the bank applied a charge off, they sold it to a collection agency. Can you guess what happened then? That's right. Another negative item. When the agency purchased the account, a “collection” was applied to his reports. What happened next!? Joe paid a settlement. When the agency collected the settlement offer, another negative item was applied to his reports listed as a “settlement” IN ADDITION TO the collection. With each negative item, Joe's credit score took a major hit. Depending on the way the bank reported the late payments, how many payments he missed, and how long the account was open and unpaid, his reports could now be tainted with:

• 30 Day Late Payment
• 60 Day Late Payment
• 90 Day Late Payment
• 120+ Day Late Payment
• Charge Off
• Collection
• Settlement

All because of one single credit card.

A credit card, if used irresponsibly, will affect every category that you're scores are based on and obliterate your over-all credit history. The ramifications can be life changing. Not only did Joe accumulate debt in overdraft fees, interest rates, and collection fees, but he also ruined his credit rating. His chances of being approved for another line of credit are slim to none and if he is approved, his interest rates will be outrageous.

How do you prevent the worst from happening? If a credit card can negatively impact all 5 categories that your credit score is based on, that means it can also have a positive effect on those 5 categories. How do you take this weapon of mass destruction and use it to your advantage? The answer is easy. Do not get a credit card if you need money NOW. That type of thinking will often result in a situation like Joe's. Apply for a credit card with the overall goal of building your credit history. It will become your credit score's best attribute and most lethal weapon!

Once the credit card is in hand, don't get crazy! When I received my first credit card, I had to keep reminding myself that even though I suddenly had $1,000.00 at my disposal, it wasn't really my money. I was borrowing it. I would have to pay it back with interest. To keep myself in check, I had to set strict rules and guidelines. If you abide by these rules too, your credit card will grow a healthy relationship with your credit score, and they will become the best of friends!

• If you must use the card, never spend more than you can pay back within a timely manner.
• Never exceed 50% of the overall limit. Period.
• Never, ever, ever miss a payment! Automatic payments are there for a reason! Take advantage of them!
• Don't close the account, even if you don't need it anymore. It's there to help you!
• Think of the credit card as a tool to build your credit score, not as extra money to use at your disposal.

A credit card used correctly is the fastest and most affective way to raise your score and build an impressive credit profile. What are the benefits of an impressive credit profile? You'll be approved for just about anything, whether it's a mortgage loan, car loans, a promotion, (yes, some jobs consider your credit for different promotions) student loans, loans for your children, and so much more. You need not fear the card! You shouldn't avoid the card at all costs. Take advantage of this tool! One single credit card could change your life for the better. Just think of what multiple credit cards could do . . . .

Your Credit Score is Costing You Thousands.

If you're not aboard the credit train already, there's no better time to jump on, except for maybe yesterday. Climb aboard and hang on for dear life because this rapid, unforgiving railroad will decide your future financial stability and your chances of owning your dream home with that quaint little garden out back.

By now, you probably (or hopefully) know the basics of the credit industry. You know that you have a credit score, or three, and those scores are what kept you from getting the auto loan for the car you wanted or the credit card to your favorite department store. You know that your score is based on a few things like how responsible you are when it comes to money, how much debt you have, and whether or not you're making your payments on time. If you're not familiar with the basics of credit and you'd like to learn more, click here to take a look at my post, "What Is Credit?". Go ahead and pat yourself on the back if you already knew all of the above. Not bad. However, did you have any idea that the difference between a credit score of 630 and a score of 730 will cost you up to $57,400 in interest alone on a mortgage loan? Whoa! And that's just in interest! Don't believe me? I don't blame you. I almost didn't believe it myself, but let's do the math together and I can prove it to you:

In this example, I have used the Loan Savings Calculator on myfico.com. I always base my credit related decisions and advice on the FICO score because it is the most commonly used score in the nation. I calculated different interest rates for a mortgage on a $200,000 home paid in a 30-year fixed term.

With a 730 credit score, the monthly payments would be about $900.00 a month. In total, the entirety of the payment would be $324,000.00.
With a credit score of 630, the monthly payments would be roughly $1,059.00, bringing the entire loan + interest to $381,000.00.

See? I wasn't bluffing. A difference of just 100 points in your credit rating could cost you $57,000 in interest on your home – that is if you're approved for the home in the first place. If your credit score is 620 or lower, you're paying about $66,000 more on a home loan than someone who possesses a score of 760 or higher. That's unbelievable! What about your interest payment on a car loan? Are you saving or spending an extra four grand?

 

Now that you've been properly introduced to the three headed monster, it's time to turn those scores into tools that will save you thousands of dollars in the long run and guarantee credit approval for the home of your dreams.

It is a common belief of mine that to tame any beast, the two of you must get better acquainted first. If you're going to repair your credit in a decent matter of time, you'll need to know what specific factors are used to generate the score. I will use the FICO algorithm, because as I said before, it has become the standard score in the U.S.

Your FICO score ranges from 300 to 850 and is based on 5 different categories:

35% of your score is Payment History.

30% of your score is Amounts Owed.

15% of your score is Length of Credit.

10% of your score is New Credit.

10% of your score is Credit Mix.

Basically, to obtain an outstanding credit score you should never be late on your payments, keep yourself out of debt, and continue to build your credit length, mix, and history with more credit cards, loans, and any other lines of credit that you can get your hands on. In a perfect world, this would be possible for everyone. However, sadly it is not. Whether your reports are reamed with negative items such as collections and late payments or your score is low due to your lack of credit, I have good news for each and every one of you:

Your credit is completely, absolutely, 100% reparable. Your score will never stop fluctuating and raising it is a lot simpler than you may think! Fix your credit in a matter of months and save yourself that extra $66,000 in interest! You don't need to pay for a monthly service or get the attorneys involved. You just need to educate yourself and know the gray areas and loop holes of the industry. For some basic tricks that you can begin with in building credit and raising your score, read my post, “5 Fast and Easy Tricks to Improve Your Credit Score!”

Raising your credit score is easier than you think! Stay tuned for more helpful posts and information, coming soon!

5 Fast and Easy Tricks to Improve Your Credit Score!

Credit can be confusing and discouraging, but there are 5 simple tricks and guidelines that you can live by to improve your credit score a bit more each month!

1. Get Acquainted With Your Credit Report.

You can't improve something that you aren't familiar with! Take time to get a credit report from each of the three major reporting agencies (Equifax, Transunion, and Experian) You may find mistakes or negative items on your credit history that you weren't aware of! As a consumer, you are entitled to one free credit report a year from each credit bureau! Take advantage! Call (877) 322-8228 or go online to www.annualcreditreport.com to get your free report!

2. Get Those Credit Card Ratios DOWN.

What is your credit card limit? $500.00? $10,000.00? What is your balance on that card right now? If you are spending more than 50% of the limit on any credit card, your score will be affected negatively! Try to pay those cards down as much as your finances allow, even if you can only pay one at a time. Whether you're making the minimum payments on time or not, spending more than 50% is hurting your credit score every single month! On the flip side, if you're spending LESS than 50%, then your credit score is impacted positively every single month!

3. Consolidate the Credit Card Debt.

If you have multiple credit cards and you can't afford to pay all of them down at once, take a good look at the different utilization ratios on each one. If it's possible for you to merge the multiple debts onto one credit card, then do it! Once your debt is minimized or combined, don't close out the empty cards that you're no longer using; keep those open and empty so they can continue to impact your score positively every month. The goal is to have as many credit card balances below 50% of their limit as you possibly can.

4. Expand Your Credit Mix.

10% of your FICO scores are based on the types of credit in use. Expanding your credit mix with loans and credit cards will have a positive effect on your score and will continue to build your credit history if you use those lines responsibly. It's important to know your credit rating before you begin applying for new lines of credit. You'll have a good idea as to what you will be approved for and how much you'll be paying in interest! For more information on how the FICO scores are generated, you can read my post, "What Is Credit?". You can also find many useful tools and facts on www.myfico.com.

5. Wipe Away the Grime!

Once you've become familiar with your credit reports, you may discover that you've got some cleaning up to do! If you've got some minor negative items such as late payments and small collections, do what you can to wipe them away and leave your reports sparkling clean! A lot of creditors are willing to remove a late payment or two if you just write them a letter, kindly asking for help in repairing your credit history. A small collection can also be removed from the reports if you can get in contact with the collection agency and offer to pay the debt in exchange for a letter of deletion to be sent to the credit bureaus. If you have more negative items than you can handle on your own, a credit repair service just might be the right solution for you! Consider doing some research on the CROA (Credit Repair Organization Act) and the FCRA (Fair Credit Reporting Act) to educate yourself on your rights as a consumer in regard to disputing negative items on your credit profile!

As I have said before, there will never be a shortage of useful information on the credit industry. The facts and calculations can bury you in a mess of misconceptions and mistakes, but if you can start with these 5 basic tips, you will be well on your way to recovering your glowing credit score!

What Is Credit?

In my experience as a Credit Adviser, the most shocking thing I have learned is how little most consumers know about their credit scores, much less about The Credit Industry in general. Let's brush up on a little history, shall we?

My lesson begins at the beginning, long ago in the late 1950's when the Fair Isaac Corporation concocted a mathematical formula to blah, blah, blah, history. Someone made a way to base your credit worthiness on a combination of different factors on your credit reports. Thus, the FICO score was born! Thrilling stuff, isn't it? You will have one score with each of the three major credit bureaus: Equifax, TransUnion, and Experian.

Equifax is the oldest of the three. TransUnion seems to be the most lenient for the majority of my clients. Experian – the thorn in my side, and probably yours as well – is the youngest bureau. There are multiple credit reporting agencies, but you'll find that in most cases, your credit worthiness will be judged based off of your rating with those three.

What is Your True Credit Score?

You have three scores – one from each bureau – and they are almost always different. There are many contributing factors, but essentially the difference in your scores is due to the differences in your credit history on each report, which is what your credit scores are based on. Why would your credit history differ on each report, you ask? Because your rating with a bureau is constantly fluctuating. The three credit bureaus update their information at different times, causing negative items to fall off of the reports at different times. In addition, not every bank bothers to report to all three bureaus. Some institutions will only report to one or two and what they're reporting – good or bad – will affect your credit history on that select report.

Unfortunately, one true credit score doesn't exist. Three true scores don't even exist. You're credit worthiness will be different with every source. Whether you're getting your numbers from a bureau, viewing your rating with a creditor when applying for a loan, or checking it on the web, you'll rarely find two scores that are exactly the same. This is why I base my decisions on my FICO scores, which seem to calculate nice averages for me and are often used by third parties. You can view your FICO scores for a fee at myfico.com. If you're worried about being approved for a loan or credit card, call the desired creditor before you apply and ask them where they pull their credit ratings from. You'll be able to find your appropriate score online or order it from the right bureau so that you can have a good idea as to whether or not you'll be approved.

A Very Fine Line.

Just exactly how high does your credit score have to be in order to be approved for credit? That's a very good question. The hardest part about being a Credit Adviser is trying to find a solid, simple, implacable answer to these types of questions. The truth is, when it comes to The Credit Industry, nothing is black and white. You shouldn't expect one easy answer to any question.

What scores are considered good and bad? What score has the potential to get you a line of credit? It's different for every situation you're applying for. If you're aiming at getting a mortgage loan, you'll need your score considerably higher than if you were just applying for a credit card with a $300.00 limit. Essentially, the scores are graded as such:

• 350-619: Poor credit. On the standard scale, the lowest score is 350 and until you've reached 620, your chances of being approved a quite slim.
• 620-659: Sub-prime. Good, not great. You have the chance of being approved for small loans, credit cards, and secured cards. Keep in mind, your interest rate will be absurd.
• 660-720: Prime. You're likely to be approved for lines of credit and there will be a rewarding difference in the interest rates.
• 721-750: This is a great credit score! You may be able to qualify for interest rates on loans that are even lower than the prime rate.
• 750+: This is an excellent rating. The world of credit is in the palm of your hand. And interest? What's that?

The ratings may vary per creditor and situation, but as you can see, just a 50 point difference in your credit score can drastically affect your chances of being approved and alter how much you're paying in interest. Click here to find out how much extra you'll have to pay in interest because of your credit rating. Your score could be costing (or saving) you $5,000 on interest ALONE on a car loan.

Great Score, Poor History.

Now that you're educated on the different credit ratings and you have a good idea on where you stand when it comes to going out and getting that new car loan, let me tear down your new found clarity with some gray areas. Any consumer with a high credit score still has a chance of being denied for credit. Here are a couple reasons why:

• Lack of credit history (for new consumers)
• Negative items (late payments, collections, etc.)
• Debt to income ratio (you owe too much debt in credit or collections)
• Too many hard inquiries (marks that appear each time you apply for credit)

You may have a great score, but when it comes to lending a consumer hundreds of dollars, the creditor looks at more than just your numbers. Banks and lenders look at your payment history, how much you owe to other creditors, and how frivolous you are with your credit profile.

Now that you've brushed up on your knowledge of the credit industry, let's begin the reparations. If your score needs a little mending, stay tuned for many new posts on the act of building or repairing credit. In the mean time, you can start with these 5 Fast and Easy Tricks to Improve Your Credit Score!