ADVANCED CREDIT STRATEGIES - Part one

We have been discussing various sub-topics of the broader category of credit. To view those articles scroll down or check out the archives section in the right hand column. Most of the information comes from my newest book, Stop Flushing Your Money Down the Drain. Now we are going to explore advanced strategies for maximizing your credit score. If you learn these things you will be better prepared to deal with your credit and credit score for the remainder of your days.

Managing your credit is a lot like taking a shower. You will function better within our society if you make it an ongoing practice.

I suggest you make some sort of action-plan. For example, once every four months obtain and review your FICO credit score. (Note: If you didn’t obtain your FICO score when earlier suggested, I urge you to do it NOW! www.myFICO.com/12). After you review it, make a list of whatever you need to do and establish time lines to do them.

Following is a list of 16 items, in alphabetical order, which will assist you to build and protect your score. The worst your score is the more these things will help you. Once your score gets to 750 or so, your efforts and improvements will be of only minor benefit, but that does not mean you are done. The stronger your report, the better it can withstand problems like inquiries or a random late payment. Be patient but persistent. With consistent effort you should be able to join the exclusive “800 club” and find yourself among the top 5% of all consumers.

Adopt a New Attitude – You should only allow creditors that you interview and approve to have access to your report. Here are the things you should ask potential creditors BEFORE you make formal application and allow access to your information:

1. Which credit bureau(s) do you use?
2. Do you use FICO scores to determine my risk/
3. How does negative credit (bankruptcy, repossession) affect your decisions
4. What is the minimum FICO score needed for approval?
5. What is the minimum FICO score needed to get the best rate?
6. Do you report my high limit and my current balance?
7. Do you report my activity to all three credit bureaus?
8. If I give you a copy of my current FICO score and credit report, will you get my loan approval without any additional inquiries? (If the answer to this question is, “No” ask the next question)
9. If I give you a copy of my current FICO score and credit report, will you get my loan approved ”subject to verifying that the score is accurate”? (Note: This assures your loan is approved prior to any inquiries being entered on your report.)

Closing Older or Inactive Accounts - It is not usually a good idea to close old accounts or other accounts that you do not intend to use any longer. Lenders like to “average” the age of your accounts, and the older the better. However, if you have such an account that has an annual fee and you have a score above 750, you might contact the lender to find out if they would restructure the account to exclude the annual fee. If not, the damage from closing the account may be minor.

Cosigning - Do not get in the habit of cosigning for other people. It is very risky, no matter whom you are trying to help. If they default, you are responsible for the debt. You also expose your score to any of their actions or inactions such as late payments. Even if they pay on time, they pull your score down because they lower your debt to income ratio. If your score comes down, your own ability to qualify for later credit might be in jeopardy. Furthermore if your insurance company gets wind of your FICO Credit score dropping they might raise your insurance premiums. In my opinion it would be better to lend them your cash than your credit.

Credit Cards vs. Cash (and checks) – Paying with cash can actually hurt your credit scores because your creditors have no way of knowing that you pay back your debts. Whenever you have an option, you should pay with credit cards instead of cash or checks because paying back those debts builds your credit score. This is especially true if your card offers cash-back or other bonuses. You can even build your credit or accumulate freebies by paying somebody else’s bill with your card and collecting cash or a check from them.

Credit Unions - Credit Unions tend to be more liberal in their lending guidelines, but the majority of them do not report to any bureaus. So use them if you will have trouble qualifying for a traditional loan or if you wish to hide a debt from your credit reports, but, if you want your good habits to be reported, do not use Credit Unions for loans. Obviously you should verify their philosophies before you decide if they are right for you.

Debit Cards - Debit cards are not the same as credit cards. They are just plastic checks.

Department Store and Other Retail Cards – These stores can be a good place to get a credit history going, but after that, do not apply for these cards. They frequently come with annual fees. Their interest rates are high and you cannot use them for other purchases. If you apply to several of them on one weekend, each inquiry counts against your credit score (the 45 day rule does not apply). That can lower your score substantially for one year and raise your insurance premiums. They will try to offer you a one-time 20% discount to get their card but resist the temptation and use your VISA or MasterCard instead.

Divorce - Do not be cavalier about who pays what. In most cases you are both responsible for any debts you took on jointly, even if just one person agrees to take over the debt. If a court orders your spouse to pay a joint debt, that does not remove your obligation as far as the lender and credit bureau are concerned. Try to get the lender to release you, in writing, or refinance the accounts into the proper person’s name. It may even be better to take on all of the debts yourself, rather than expose yourself to years of bad credit because your ex does not look upon your score with the same seriousness that you do.

Explanation Letters - You have the right to explain anything on your credit report and it might make you feel better, but such explanations do not affect your score. Very few lenders read them anyway. If you feel a need to dispute something, your time will be better spent by going directly to the creditor who reported the activity in the first place. If needed, you can hire an attorney or a credit repairing company to help you.

Finance Companies – Your FICO score likes banks a lot more than finance companies. Finance companies usually (but not always) include the word “financial” in their name. Having any loan at a financial company can actually lower your score. Avoid them.

How Income Affects Credit Ratings - Ordinarily, your income has nothing to do with your credit score. High income, raises, bonuses etc. will not overcome poor credit. It illustrates your capability for making payments, but it does not indicate whether you will pay your bills on time or at all.

Inquiries – There are two basic types of inquiries to your credit scores. One type is relatively harmless but the other one poses more risk to you. If someone is checking you out just to find out if you are a responsible person, like a potential employer or an insurance company, there is little or no affect to your credit score.
But, if you knowingly give a lender or anybody else your social security number or apply for credit, their inquiry can bring down your score. People with scores above 750 do not have to worry about this very much because they will only lose a few points, but people who are just starting to build their scores or pose other risks might see drops in their score of 10 points, or more. Credit related inquiries remain on your report for two years, and count against your score for one year
Ordinarily, all similar inquiries within a 45 day window count as one inquiry. The system understands that a person might be “rate shopping”, so bunch similar inquiries together to prevent unnecessary damage to your score.
To reduce or avoid unnecessary inquires, obtain your own current copy of your credit report and FICO score, and then provide that to lenders yourself for review prior to formal application. Your inquiry of your own score does not count against you.

Lag Time – In a worse case, it may take up to 60 days for changes to show up on your report after they are received.

Late Payments - Know what constitutes a late payment with your creditors. Sometimes you have a grace period but sometimes not. It is not just a matter of when late fees kick in. You want to know about their reporting practices.
Recent late payments or a pattern of late payments will be more damaging to your report than a late payment in the past. When a lender reviews your payment pattern they can recognize that one late payment is an exception to your usual good habits.

Limit Reporting - Some lenders do not report your “limit”, or even worse, they report your current balance as your limit. This implies that you are stretched financially and brings down your score. You should avoid these lenders.

Negative Comments – Do not allow negative comments to invade your credit report. These include collection accounts, judgments, deed in lieu of foreclosure, write offs, repossession, negotiated settlement, accounts included in wage earner plan, bankruptcy, negotiated settlement, and FED actions (financial arrangements with tenants facing eviction). These comments lower your score and paying them off will not raise the score back up. If you pay such an account after it shows up on your report you are stuck with it as negative information on your report for 7 years. Work with lenders to remove such comments or hire an attorney or credit repairing company to help you remove these types of comments ASAP.

I will post the second half of this list in a few days. Be sure to come on back.

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