Raise your Credit Score for Free and By Yourself

Need to get your credit score up?  Don’t pay anyone to do it–its probably a scam!  There may be a very simple way for you to increase your score staring right at you on your credit reports: your balances.

This may not apply to some people, but for anyone with revolving accounts (credit cards or store cards), your score may be hurting (and badly!) because of these accounts.  Why? The balances.  Often I hear people talking about things like “debt to income” when it comes to credit scores.  Your debt to income ratio has absolutely no impact or effect on your credit score.  None.  What does, however, is your balance to limit ratio, which can have a huge effect on your credit score.

Your balance to limit ratio applies to your revolving accounts and it refers to how much you owe and how much your credit limit is.  It is a percentage calculated like this:

balance owed (reported) ÷ credit limit =

So if have a Visa card with a $1,000 limit and you owe $300 on it, it would be 300/1000 = 0.30. And 0.30 is, of course, 30%.  This percentage is calculated for each of your revolving accounts.

In addition, the scoring software looks at the total amount of credit made available to you compared with the total amount of credit you have used.  Here’s an example – on the table below, the individual has 3 major credit cards and 2 store cards.

 

So, the person above has a total credit card debt of $4,385.  The banks have extended him credit though of $17, 250; overall, he has used about 25% of his total credit available.  This is not bad – remember: credit scores ideally want to see this ratio at under 20%.  And the farther under 20% the better – basically, the best credit scores come from lots of available credit and little to no balances.  I have seen plenty of people with solid payment history – 2 or more years even of never missing a payment – and still have a score in the low 600s.  The BTL is quite often why.  So how do you quickly stop this from hurting your score?

Well, the obvious response is to pay down the balances. You may not have $4,000 lying around though, so you come up with a strategy to maximize the impact based on the amount of money you have.  And you start with correcting the problem from the other side.  Lowering the balance will lower the BTL. So too will increasing the limit.  Call your credit card company and ask for a credit limit increase.  In the table above, raising the Citibank limit from $3,000 to $5,000 brings the BTL on that account from 40% to 28% without a single dollar paid. NOTE:  Requesting a credit limit increase may or may not result in a hard credit inquiry.  If the reason you are working to get your credit score up is for a mortgage, for example, you should find out if your creditors will do increases without a hard inquiry.

As for paying on the balances, I would target one balance in particular first:  the Pier 1 card.  As is often the case with low-limit credit cards, the balance of $725 is not very high but because of it being just $25 shy of the credit limit it is hurting.  That individual account, because it has less than 10% of the credit limit available, is dinging the credit that way as well.  Try to get the limits on your store cards raised if possible.

Pay down the balances.  Determine your statement cut date – one day before the statement cuts is your last day to pay the balance as low as possible.

My Thoughts on Applying for a Car Loan

So you are in the market for a new car.  You think you know your credit score but in all likelihood you do not because there is nowhere you as a consumer can access your auto-enhanced score with any of the bureaus.  An auto loan is an installment loan and the auto-enhanced score weights more heavily your installment loan history. Have you had an auto loan in the past? Was it paid satisfactorily?  Mortgages and student loans are also installment loans, as are personal loans (though these are much less common).  If you have not had any installment loan history, more than likely your auto-enhanced score will be lower than the FICO score you can purchase online.

I became friends with a Finance Manager at a Lexus dealership who gave me a few “suggestions” when it came to completing the application. When it asks you how long you have lived at your current residence, he said to always put at least 3 1/2 years.  When asked how long you had been employed at your current job, always put at least 2 years.  This information is rarely if ever verified but he said it often was considered in reviewing applications.  Unlike a house, a car is a piece of property that can be moved around even though it is liened – thus, the bank likes to see that you have lived at the same place for a while, worked at the same job – that you are stable and not going to disappear in a few months. 

When you go to an auto dealership and apply for financing there, be prepared for them to “shop” your loan – meaning, they will send your credit application to the captive lender and two or three other banks.  (The captive lender is, for example, VW Credit Services if you are at VW.)  The dealership will pull your credit, then each of the lenders they send your loan to will pull it as well, so you will end up with a bunch of inquiries that WILL count as hard inquiries, regardless of what the salesman may tell you.  I can tell you based on just a few pieces of information whether or not you will get approved – if you are not confident, you should consider running it by someone who knows first and save yourself time.  If you have defaulted student loans, no auto loan history, and a score in the mid-500s, you are not going to get approved at a dealership – well, not without 50% down, and even then it is not guaranteed. 

My best score is with Transunion, so when my Transunion score soared above 720, I applied online with VW Financial Services, as I knew they would only pull Transunion.  As expected, I was approved immediately and referred to my local VW dealership.  I went in the next day and basically just had to pick out a car.  My credit was not pulled again and the financing was not an issue.  I was approved for a lease with a low interest rate and nothing down.  Had VW pulled Equifax, things would have been very different. 

I personally believe the best thing for your credit when it comes to an auto loan appearing on your credit is for it to be with the captive lender. If it isn’t, it just looks bad.  The captive lender is where you get the lowest interest rates, the cash back, etc.  If you can’t get in with them but you are a member of a credit union, I would suggest applying with your credit union before you even go to the dealership.  Credit unions also offer great interest rates and if you get approved, you will go to the dealership in a stronger position, as you won’t need financing from them at all. 

Even if you don’t know your auto-enhanced score, having a general idea of what is on your credit file before you go car shopping is a good idea.  If you have a low credit score, especially due to recent missed payments or delinquencies, you should know what you will be faced with.  Without excellent credit, it is highly unlikely you will be approved for a lease.  My Jetta had a sticker price of about $30,000 – and my lease payment is $414 per month.  If I had financed the car for five years at 10% interest, the payment would be $637 per month; at 20% interest, it would be nearly $800 per month.  It is not uncommon for dealerships to use lenders charging exorbitant interest rates of 25% or higher for people with compromised credit.  Additionally, at an interest rate of 20%, to get that payment down to what my payment is, you would have to put about $13,000 down – almost half.  Now, if you are in a position to do so, you will have equity in your vehicle and be able to pay it off more quickly.  If not, though, you may be unable to get the car you want because the monthly payment is too high based on your income.

And finally, with regard to applying for an auto loan, apply for a car you can easily afford the payments.  Make your monthly payments on time and you will find your car buying experience in the future to be simple and easy – and you will save a fortune each month not paying outrageous interest.  I can’t imagine paying $800 a month for my car, but $414 is just fine.

 

The Benefit of Store Cards

I am not usually an advocate of store cards.  Why use a store card for something you can use a major credit card for, which will likely have a lower interest rate and possibly offer you airline miles or some other benefit?  Besides, store cards can be just another bill you have to deal with every month.  Yeah they may offer you some coupons every month, but they rarely come with interest rates below 24%, so how much would you really be saving?

For someone working to build new credit, store cards can potentially be a major help.  Most store cards are issued by one of two major banks:  Comenity Bank and GE Merchants Bank/GE Capital Retail Bank (GEMB/GECRB).  Opponents of store cards and using them to rebuild credit will often cite the adding of inquiries to your credit report for each store card.  Well, with Comenity Bank, one can use the “shopping bag trick” to get approval with just a soft inquiry – I just did it a few months ago and got an Express card.  With regard to GEMB/GECRB, they will pull your TransUnion credit report and score – and for the most part, if you get approved for one GEMB card, you will get approved for any of them.  TransUnion inquiries are the easiest to bump off, so my approach was (1) pick whatever GEMB cards I wanted and apply for them all same day then (2) bump all the inquires off TransUnion within the next month.  I started with the WalMart card, then got the Banana Republic, Amazon, Belk and Chevron cards.  After four months of good payment history on your GEMB-issued card, you will get a credit limit increase.

Just because you have the store cards does not mean you need to use them.  Most of mine I have used one time, paid the entire balance off, and then just left it alone.  It will add positive, active tradelines to your credit file and increase your total revolving credit amount, making any balances you may carry on your major credit cards have less impact on your credit score.  When I began my credit repair in December, 2013, I had ZERO positive, open credit card accounts.  Less than three months later, I have EIGHT open revolving accounts of my own (plus two on which I am an authorized user).  I pay my balances in full every month and I know when summer is here and my accounts have all aged six months or more, my score will have improved even more and I will be able to open accounts with Barclays Bank, Discover, etc.

If you don’t know the shopping bag trick or understand bumpage, this may not be the best idea for you.  Also, GEMB does not like public records or collections (from my experience).  Start with Walmart – if you don’t get approved there, no need applying for any other GEMB accounts.  And if you have a collection or public record and are not approved, that is more than likely why.

All my store accounts are showing on my credit files already.  My current FICO score is 733 (TransUnion).  When I started my credit repair less than three months ago, my score was 496.  So, in three months, I have raised my score 237 points.  It can be done.

Awareness

Do you know your credit score? If you are thinking no, good answer – very few of us do. If you are thinking you do, where did you get your score?  If you got it from FreeCreditReport.com, you don’t know your score.  If you got it from TransUnion’s or Experian’s websites, you don’t know your score.  More than likely, if you got it from Equifax’s website, you don’t know it, unless you happened to buy ScoreWatch or another Equifax product that includes your FICO score.

Basically, if you didn’t get it from myFICO.com, you didn’t get an accurate score (if you have a Discover card or Barclay Bank credit card, you should be receiving FICO scores monthly – these are good, take advantage of them!).  Vantage Scores, PLUS Scores, and any other non-FICO scores are worthless and a total waste of money.  Lenders don’t use them, you shouldn’t either.

Don’t think I am a Suze Orman junkie though.  Even if you got your FICO score, chances are it isn’t a hundred percent accurate.  Suze never tells you that you actually have 49 FICO scores, as there are 49 different models/formulas lenders can choose from when they pull your credit.  FICO also released an updated score model (FICO08) but even on their own website sell consumers TransUnion 98 scores.

Why does this matter? The most dramatic example, perhaps, can be seen in mortgages.  A $250,000 house will cost you about $1600 a month with a score in the low 600s.  If your score is in the high 700s, that same house will cost you $1200 a month.  $400 a month for 30 years is $144,000.  Think it matters now?

The thing is, both scores qualified for the mortgage loan – one just qualified for a much better one.  How many people just accept the rate they are given?  The credit world affects us as consumers in a major way and banks and creditors have worked hard to keep us in the dark.  The sooner we become involved in this world, the better off we will be.

Success!

I began working on my credit on December 1, 2013.  When I pulled my FICO score with TransUnion then, it was an abysmal 496.  In less than two months, though, I was able to bring increase that score by 222 points!  I brought my score from where lenders would not even look at me to prime status – and I did it on my own.

When I first pulled my credit reports in December, 2013, I discovered a lot of bad stuff.  For starters, there were nine (9) collection accounts, eight of which were from 2013 and the remaining one from 2012 (point: they were ALL recent collections and thus causing maximum damage to my credit score).  Additionally, there was a judgment present from 2011.  Multiple student loan accounts appeared, 7 showing derogatory (90+ days late) in May, 2007, 1 (a private loan) showing as a charge-off, and 1 (the consolidation loan) reporting derogatory 14 of the last 24 months and quite a bit more prior.  There was only one closed revolving account on file – not showing as negative, but not really showing a payment history and it was closed.  A few of the student loan accounts were reporting paid and closed (positive), but they were older and far outnumbered by the negative?

So where do you begin?  I started from a couple different angles.  First, you gotta have positive, active tradelines reporting if you want to build a good credit score.  Even with bad credit this is still possible.  I did this two ways.  My first method may not be an option for everyone, but if it is, take advantage of it.  I had my folks add me as an authorized user to two of their major accounts (in my case, Citibank and American Express).  Their Citibank account was opened over 15 years ago, has never had even a thirty-day late, and had a credit limit of $15,000 and a balance of $100 – this is, perhaps, the truly ideal authorized user account to add.  It took about 2-3 weeks for both accounts to start showing on my credit reports.

The second method is one available to everyone but one that will require you to put up some cash – and the more the better.  I opened two (2) secured credit card accounts, one with my credit union and the other with Capital One.  The former required me to put up $500 and the latter $200, neither of which are ideal credit limits but they are somewhere to start.  Within a few weeks, both were appearing on my credit reports; with the authorized user accounts, I went from zero to four open tradelines in less than a month.  An excellent start.