This article is the second of two parts. It identifies some of the philosophies and practices of those with excellent credit. If you are looking to improve your credit score, you will want to know all of these items and implement them on a regular and on-going basis. The first half of the article can be found below. There were 32 points all together. Let's get after the second half of that list.
Negotiated Settlements – If you settle an account such as a Deed in Lieu of Foreclosure for a real estate loan, or an account that was sent to collections try to get the lender, as part of the settlement, to report the account as “paid as agreed” instead of “settled” or some similar damaging comment.
Old Accounts - Dormant accounts might get closed by the lender/creditor which neither helps nor hurts; but, using those old accounts enough to keep them active serves to help your score. You get the best impact on your report if you use the credit you have and pay it off each month. I suggest you use each account at least twice per year and pay them off in-full and on-time when the bill comes in.
On-time Payments – This is the single most important thing you can do to build your score. If it looks like you may not be able to make your payment on time, try to borrow some money from somebody else so that you can fulfill your obligation. Set up auto pay if it fits your life style. It is painless and it makes you smell like a rose.
If you want the best possible credit habits, observe that paying “on time” means no later than the due date. For example there are ordinarily four time-frames in which you might pay a mortgage payment: 1) It is due on the first of the month; 2) On the second of the month it is “late without penalty” and a grace period takes effect; 3) Somewhere around the tenth, a late fee kicks in; 4) On the thirtieth, it is late for credit purposes. Therefore, any payment that is not made before the first of the month is late, even if there is a grace period. The best practice is to pay such bills on or before the first of the month. This may be the one thing that gets you favorable treatment the next time you apply for new credit.
Plan Ahead - If you are planning on getting both a home mortgage and a new car (or other personal property) in the near future, it is much better to get the home loan first. When it comes to qualifying, auto dealers and banks are much easier to work with than Mortgage Companies.
Preapproved Credit - Ignore notices that you are “Preapproved” for a credit card or home loan. If the letter suggests that they still have to check your credit score, then they are no different than any other lender. This is not the best way to determine who deserves your business. A much better alternative is to check out www.creditcards.com.
Protection Programs - Somewhere along the way, your credit card company will probably offer you a “Protection Program”, which is nothing more than insurance wherein they propose to make payments for you if you get hurt or lose your job. I do not recommend these programs unless you have more of this type of risk than the average person.
Refinancing Real Estate - Avoid perpetual refinancing of your home to get cash out. It creates inquiries, it adds to your debt ratios and it cuts down on long-term reporting.
Reward Credit Cards - Certain banks offer frequent flier miles, cash-back or other perks each time you use your card. Sometimes they will even give you a huge upfront bonus for opening their account. My wife and I each obtained such a card just because they offered us a free round-trip ticket to San Diego with a popular airline. The interest rates they charge for these cards tends to be higher than some other cards, but if you expect to pay off your card each month the interest rate is not overly relevant.
If you acquire cards that pay you cash-back or bonuses, you can dig deeper for ways to use your card. For instance, many car dealers will let you pay the first $2,500 of your purchase with your credit card. You can also pay for most insurance, (health, life, auto, home owners) this way.
Security Issues - Do not ever give out your card numbers to anybody you do not know, especially over the phone. If someone wants your information, you should acquire the phone number of their company from an alternate and reliable source, and then call them back to be certain they are who they say they are.
I am not a fan of signing the back of my cards because I do not want bad guys to know what my signature looks like if my cards get lost or stolen. Sometimes, merchants will make me show an ID when they notice my card is not signed, but that is fine with me.
It is possible that someday, somebody will gain access to your card and charge stuff that you do not authorize. You will not ordinarily have to pay those expenses, provided you report the matter to your credit card company within 60 days. They will usually close down your account and issue a new card with new numbers. Obviously, this is an important example of why you need to pay close attention to the details of your statements.
Split Accounts – A married couple may find it useful to apply for some separate credit. That way, certain debts don’t count against both of you. Also, each individual is better off if there is a divorce or death.
The 45-Day Rule - Use this dynamic rule to your benefit. If there are multiple inquiries on your report for a similar-looking loan, within a 45-day window, the credit report believes you are rate-shopping, not buying multiple items; therefore all of those similar-looking inquiries combined, only count as one inquiry against your score. You can apply to several lenders for an auto loan or a new VISA card to see who might give you the best rate. You might even elect to take on two or more MasterCard accounts at the same time. If so, the damage from inquiries will be minimal. Furthermore, your utilization rate (see below) could improve substantially because you have more unused credit. On the down side, the average age of your accounts will drop, which usually lowers scores. However, a year later you would still be better off than the person who gets one such account now and another one after the year passes. Your two accounts will have an average age of twelve months but the other person’s accounts would only average six-months. Therefore, we are back to the fact that the 45-day rule can be an effective tool.
Transferring Balances - Pay debt rather than shifting it to new accounts. It seems smart to transfer debt to loans or cards with lower rates, but it can actually hurt you. New lenders will perform a new inquiry and may ask you to close an old account before they extend credit to you. You could end up with a closed account or an unwanted inquiry and both of those reduce your credit scores.
Tweak Older Accounts – From time to time, review your older established accounts and seek to improve them. For instance, you might be able to get the annual fee eliminated or the interest rate lowered. Sometimes lenders will update a comment from 30 days late to “paid as agreed” as a courtesy. It is fairly easy to get credit limits raised, which is usually an immediate improvement to your score.
Types of Accounts – It is considered prudent to have a variety of accounts. A good balance would be two to three major credit cards, one installment loan (car), one home loan, and a retail card or gas card.Negotiated Settlements – If you settle an account such as a Deed in Lieu of Foreclosure for a real estate loan, or an account that was sent to collections try to get the lender, as part of the settlement, to report the account as “paid as agreed” instead of “settled” or some similar damaging comment.
Old Accounts - Dormant accounts might get closed by the lender/creditor which neither helps nor hurts; but, using those old accounts enough to keep them active serves to help your score. You get the best impact on your report if you use the credit you have and pay it off each month. I suggest you use each account at least twice per year and pay them off in-full and on-time when the bill comes in.
On-time Payments – This is the single most important thing you can do to build your score. If it looks like you may not be able to make your payment on time, try to borrow some money from somebody else so that you can fulfill your obligation. Set up auto pay if it fits your life style. It is painless and it makes you smell like a rose.
If you want the best possible credit habits, observe that paying “on time” means no later than the due date. For example there are ordinarily four time-frames in which you might pay a mortgage payment: 1) It is due on the first of the month; 2) On the second of the month it is “late without penalty” and a grace period takes effect; 3) Somewhere around the tenth, a late fee kicks in; 4) On the thirtieth, it is late for credit purposes. Therefore, any payment that is not made before the first of the month is late, even if there is a grace period. The best practice is to pay such bills on or before the first of the month. This may be the one thing that gets you favorable treatment the next time you apply for new credit.
Plan Ahead - If you are planning on getting both a home mortgage and a new car (or other personal property) in the near future, it is much better to get the home loan first. When it comes to qualifying, auto dealers and banks are much easier to work with than Mortgage Companies.
Preapproved Credit - Ignore notices that you are “Preapproved” for a credit card or home loan. If the letter suggests that they still have to check your credit score, then they are no different than any other lender. This is not the best way to determine who deserves your business. A much better alternative is to check out www.creditcards.com.
Protection Programs - Somewhere along the way, your credit card company will probably offer you a “Protection Program”, which is nothing more than insurance wherein they propose to make payments for you if you get hurt or lose your job. I do not recommend these programs unless you have more of this type of risk than the average person.
Refinancing Real Estate - Avoid perpetual refinancing of your home to get cash out. It creates inquiries, it adds to your debt ratios and it cuts down on long-term reporting.
Reward Credit Cards - Certain banks offer frequent flier miles, cash-back or other perks each time you use your card. Sometimes they will even give you a huge upfront bonus for opening their account. My wife and I each obtained such a card just because they offered us a free round-trip ticket to San Diego with a popular airline. The interest rates they charge for these cards tends to be higher than some other cards, but if you expect to pay off your card each month the interest rate is not overly relevant.
If you acquire cards that pay you cash-back or bonuses, you can dig deeper for ways to use your card. For instance, many car dealers will let you pay the first $2,500 of your purchase with your credit card. You can also pay for most insurance, (health, life, auto, home owners) this way.
Security Issues - Do not ever give out your card numbers to anybody you do not know, especially over the phone. If someone wants your information, you should acquire the phone number of their company from an alternate and reliable source, and then call them back to be certain they are who they say they are.
I am not a fan of signing the back of my cards because I do not want bad guys to know what my signature looks like if my cards get lost or stolen. Sometimes, merchants will make me show an ID when they notice my card is not signed, but that is fine with me.
It is possible that someday, somebody will gain access to your card and charge stuff that you do not authorize. You will not ordinarily have to pay those expenses, provided you report the matter to your credit card company within 60 days. They will usually close down your account and issue a new card with new numbers. Obviously, this is an important example of why you need to pay close attention to the details of your statements.
Split Accounts – A married couple may find it useful to apply for some separate credit. That way, certain debts don’t count against both of you. Also, each individual is better off if there is a divorce or death.
The 45-Day Rule - Use this dynamic rule to your benefit. If there are multiple inquiries on your report for a similar-looking loan, within a 45-day window, the credit report believes you are rate-shopping, not buying multiple items; therefore all of those similar-looking inquiries combined, only count as one inquiry against your score. You can apply to several lenders for an auto loan or a new VISA card to see who might give you the best rate. You might even elect to take on two or more MasterCard accounts at the same time. If so, the damage from inquiries will be minimal. Furthermore, your utilization rate (see below) could improve substantially because you have more unused credit. On the down side, the average age of your accounts will drop, which usually lowers scores. However, a year later you would still be better off than the person who gets one such account now and another one after the year passes. Your two accounts will have an average age of twelve months but the other person’s accounts would only average six-months. Therefore, we are back to the fact that the 45-day rule can be an effective tool.
Transferring Balances - Pay debt rather than shifting it to new accounts. It seems smart to transfer debt to loans or cards with lower rates, but it can actually hurt you. New lenders will perform a new inquiry and may ask you to close an old account before they extend credit to you. You could end up with a closed account or an unwanted inquiry and both of those reduce your credit scores.
Tweak Older Accounts – From time to time, review your older established accounts and seek to improve them. For instance, you might be able to get the annual fee eliminated or the interest rate lowered. Sometimes lenders will update a comment from 30 days late to “paid as agreed” as a courtesy. It is fairly easy to get credit limits raised, which is usually an immediate improvement to your score.
Utilization Rate – Lenders compare your total debt to your available credit to get a measure of how much risk you present. Assume you have 2 cards, each with a $2,000 limit. One card is maxed out but the other card has a zero balance. Your revolving utilization is 50%. If you close the account with no balance, then your revolving utilization jumps to 100% which is horrible. It is far better to have a low percentage.
Verify – Whenever you open a new account wait for 60 days and then verify that the lender is indeed reporting your good behavior to all three credit reporting agencies.
I will have a couple additional articles on credit soon.
If you have some extra time, you might visit my other blog. The most recent article has to do with the likelihood the US will run out of oil.
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