Higher FICO Credit Scores – Lesson #6

Higher Credit Scores

This lesson covers some tips to get a higher FICO credit score and reduce your personal debt.

See all the ads on TV that say – “we erase your bad credit” or “we can remove bankruptcies”? Notice your gut reaction is to not believe them. Trust your gut. There is no quick fix for a low credit score, but that doesn’t mean you are sunk. We’ve spoken to lots of folks who have increased their credit scores by a 100 points or more in less than a year.  Yes, a higher credit score is in your reach.

So first things first, if you want to get your credit score higher, first you need to know what it is. We’ve discussed various websites in previous lessons and you can help out our cause by connecting through the VideoCreditScore.com website.

Next, in tackling a hard project of any kind, it’s nice to get a few easy victories. When you clean your house, sometimes it’s better to tackle the easy jobs first. Apply this theory to your credit scores.

Question: in your case, what’s easier, paying of thousands of dollars in debt or removing incorrect items on your report that could be as detrimental to your score? Inaccuracies can be fixed in a few months or less so that’s the place to start. Your first step after receiving your credit scores, is to read your report carefully and dispute any inaccuracies you have.

We talked about credit disputes in our credit score myths lesson. 25% of you may have score impacting errors; make sure you dispute errors, as it’s usually easier than some of the next steps.

Next, you’ll need to build a “credit snapshot and we’ll show you an example. For all your cards, you need to collect the following info, your APR, or annual % rate or interest rate, your balances, your minimum payment, calculated as 2-4% of your balance and your credit limit so you can see your credit utilization ratio.

In our example, Jamie has 3 cards, yes we know that’s less than average, but we want to keep this simple. She’s collected all the info: the card, the APR, the balance, her minimum payment and her credit utilization.

Let’s take a look back at the credit score pie.

High scores are all about managing to the credit score factors or the credit score pie. We think it’s best to focus on the biggest pieces which are payment history and amounts owed. Impacting these is critical to a great score and here’s how.

In our example, Jamie has paid her cards late; this could mean not paying at all, or paying less than the minimum. First off, she must pay the min, on time, each month!!!

So if you’ve been late, for your sake, you’ve got to back on time and NOT be late again. If you don’t have a system for paying on time, get one. You’d be surprised how high a score someone can have if they just pay on time. I saw this first hand at a university where few students could pay more than the minimum yet they had decent scores. If you are late, your first goal is to be on time with the minimum payments, once you do this then it’s time to be on time with more than the minimum. If you can’t make your minimum payments each month, you may want to contact a non-for-profit credit counseling organization to assist you.

So let’s say Jamie has $500/mth to put towards her cards. Now that she’s disciplined, she pays the $308 in minimum fees, and then needs to apply the rest someplace else. In most cases, you want to pick the highest rate card first, and apply all of it until it’s paid off, then the next highest card and so on. Remember in some cases it helps a score more to payoff by how “maxed out” the card is. But, both strategies have long-term positive impacts.

The key is paying above your minimum payments. Here’s an example of how credit adds up: your kids beg you for a Playstation 3 for $499 [or maybe you want one yourself]. A $499 charge will take almost 8 years to pay off doing just the minimum payments, and less than 3 years if you pay double the minimum payment each month. By paying just the minimum you have almost doubled your total cash paid.

Let’s say your cc debt is now consolidated on to a few cards that have all the same rates.

Because we get tired of saying Credit Utilization Ratio we are going to use the Acronym C. U. R.

CUR stands for Credit Utilization Ratio and it’s the ratio of Credit Used to Credit Limits. People who max out their cards tend to have lower credit scores because they are statistically more risky – i.e. likely to default.

Let’s go back to Jamie’s situation. She’s done great and paid off her store card and she’s managed to get her cc debt into cards with the same rates. Next, she needs to work on her individual CUR and her aggregate CUR.

For her $500 to apply, she wants to make the minimum on both and then apply the rest to the more maxed out card, in this case example, the MasterCard. See how the MasterCard has a 66% CUR vs. the VISA at 50%? Making a bigger payment to MasterCard will allow her to lower her CUR. Once she gets these 2 CURs to be even, she will want to split the funds to lower them both simultaneously.

…You’ve got to start working on your credit utilization ratio or CUR. In addition to following Jamie’s example…here are some other things worth trying to get a higher credit score. Especially if you have gained a few score points as of late. You can apply goodwill tactics.

1. Call your credit card company and tell them you will switch providers unless they will raise your credit limits. This doesn’t always work, but it might, as they want your business. What does this do? A higher credit limit lowers your CUR and that will improve your score. Note: this is getting harder in the current economy as credit issuers are cutting credit limits.
2. Also, ask your credit card company to lower your interest rate. This one can be tougher, but again the threat of leaving them might help. Or you can ask to be converted to another of their cards with a lower rate. Note: this will lead to a hard inquiry. This won’t help your score so much as it will help you pay less in interest and more in principal!!! And that will lower your balances!
3. Make a payment on your cards twice a month. Hey, you get paid 2x per month, so even if your monthly outlay is the same, it will help you as you will not incur as much interest expense. If you pay online many sites allow you to pay as often as EVERY FEW DAYS! If you pay by mail, just write down the address and make your own envelopes.

We look at Goodwill tactics as your opportunity to reward yourself for good behavior. Look, behave badly and a credit issuer may lower your limit or raise your APR, so shouldn’t you get a limit raise or an APR decrease if you’ve been paying on time?

Let’s go back to the Credit Score Factors Pie. What about length of credit history? Avoid closing down credit cards that you have a long history with. Start building credit early in life, after high school, so you can have a long credit history by the time you are 30 years old. What about mixture of credit? Not the best strategy to try to aim higher by getting a mixture. Leave this until your credit is more sound. Inquiries? Simple, no new cards/loans until you have a high credit score again.

Marriage, Divorce and Credit Scores – Lesson #5

Today we are going to talk about Marriage, Divorce and Credit Scores.

As if the credit scoring game isn’t hard enough to track with 3 scores per person, once you get hitched, you now have 6 scores to worry about. Many people think their scores merge when they marry. Not true. There is no such thing as a joint credit score. So face it, you have 6 Scores now. If you haven’t pulled all 6 of your scores do it now.

Your scores can become interdependent depending on how you handle credit.

There are many situations you could be in but all the scenarios take too much time, so we will go right to our recommendation. each of you should have your own personal cards and also establish some joint cards. These don’t have to be new cards; you can take one of your current cards and make it joint. Why do we like this setup? It means you have your own credit but share credit as well.

Financial experts will then tell you that you should try to use your personal cards for personal use and your joint cards for joint-community purchases.

If you came into the marriage with no credit cards, this is a great opportunity to establish credit of your own. Get your own cards, and establish a bank account. These are good things to do while you are married, as you can get an “assist” from your spouse’s credit.

Remember we discussed earlier how credit scores are looked at when getting a home loan and that often they take the mid score. So what do they do now when you are married? Answer: They often compare your mid score to your spouses and take the lowest one. Car companies usually pull one for each of you but they may take a similar approach if you both plan to sign for the car. They will likely go with the lower score, because it gets them a higher interest rate. Did you know that some car companies make most of their profit from financing?

Another option: if you have a higher score than your spouse and you can qualify for a better rate based on your income, with just your score, then just put your name on the loan application but put both names on the title. This way you get “community property” AND you get the best loan rate.

Divorce is hard. No way around this. We constantly hear stories of people whose credit was wrecked in divorce. So everyone wants to know what should you do with your credit when you get divorced?

When you divorce, you must contact each credit grantor and either close all joint accounts or convert them to individual accounts. Personally, I like converting accounts so you hang on to your credit limits. Let’s go back to our example with Jack and Jill, in this case Jack converts the Visa and Jill converts the Amex to an individual acct.

If you have trust issues, you should consider closing down the joint accounts completely. This way, what you end up with should like what you came to the marriage with, only cards that just have 1 name on them.

Why be so careful? Well finances usually get harder after a divorce.

According to the US Census Bureau, only 37 percent of custodial mothers receive the full child support payments they are due. Only 15 percent of all divorced women are awarded alimony, and more than one out of four never receive any of the awarded alimony payments.

Countless studies show that money is the biggest cause of marital stress and divorce, so follow our advice and check all 6 of your scores first, and setup your cards to lead to success. If you are going to monitor your score with a product like Score Watch, you should monitor it for both spouses.

Join us in the next lesson, which discusses Higher Credit Scores.

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