How To Increase Your Credit Score

Did you ever wonder how it is you can go online and be approved for credit within 30 seconds?

How about getting pre-qualified for a car without anyone asking about your income?

Why do you get one interest rate on loans while your neighbor gets another?
 

The answer is your credit score.

Your credit score is a mathematical number that is generated by a mathematical formula based on the information provided in your credit report. Compared to the information of millions of other people. The resulting number is a prediction of how you will pay your bills. Thus making the accuracy of the information contained in each of your credit reports extremely important.

Credit scores are used extensively and if you have ever gotten a loan for a car, mortgage or even a credit card, the rate that you received was in relation to your credit score. The higher the score, the lower the interest rate. Lenders use a variety of different models to determine your credit worthiness but the most common is the FICO score developed by the Fair Isaac Company. Their scale runs from 300 to 850. The average consumer will score between 600 and 800.

Fair Isaac reports that the American public's credit scores break down as follows:
·        499 and below - 2%
·        500 to 549 - 5%
·        550 to 599 - 8%
·        600 to 649 - 12%
·        650 to 699 - 15%
·        700 to 749 - 18%
·        750 to 799 - 27%
·        800+ - 13%

The exact formula for determining the score seems to be a closely guarded secret, with only vague explanations on how the score is calculated. To make matters even more confusing, each of the three major credit bureaus has their own version of the FICO scoring method. Equifax has the BEACON score, Experian has the Experian/Fair Isaac Model and TransUnion has the EMPIRICA score, each using different formulas.

But there does seem to be some ray of hope on the horizon because the credit bureaus collaborated on a standardized scoring model called the Vantage Score. The score range is between 501 and 990 with a corresponding letter grade, A through F, with a school-like grade of A being the best. But until this scoring model catches on, consumers will continually be confused.

No matter which type of scoring method is used, it is vitally important to have the best credit score possible. The better the score, the better he interest rate. According to Fair Isaac's website, a score of 520 will receive an interest rate 4.36 percent  higher than a consumer with a score of 720.
To put this in perspective, a $100,000, 30 year mortgage, the difference would cost more than $110,325 extra in interest charges. The difference in the monthly payment alone would be $307.

If you rented an apartment, got braces, bought cell phone service, applied for a job that involved handling a lot of money, or needed to get utilities connected, there's a good chance your score was pulled.

If you have an existing credit card, the issuer is likely to look at your credit score to decide whether to increase your credit line -- or charge you a higher interest rate, according to a credit scoring study by the Consumer Federation of America and the National Credit Reporting Association.

Until recently, many Americans didn't even know this number existed because it was a closely guarded secret in the lending industry. In fact, lenders were prohibited from telling borrowers their credit score. The line of reasoning: The number was the result of analyzing complex financial data that the layperson would have difficulty understanding. Plus, if people knew their score (according to the industry mindset at the time), they might be able to change their behavior to manipulate the score and throw off the whole model, rendering it useless.

All that changed a few years ago, when consumers began finding out about the score and demanding to see it. In an unprecedented move in 2000, online lender E-Loan offered to give consumers their scores for free, with information explaining how the score is calculated and how they might improve it. Fair Isaac responded by cutting E-Loan off from its source of credit reports, effectively crippling its ability to lend money. E-Loan stopped giving away credit scores.

It seems like the deck was being stacked against consumers.
Today, consumers can purchase their credit scores online from a number of different sources and everyone is now entitled to a free copy of their credit reports from all three credit bureaus. It is highly recommended that a consumer examine their credit report for errors once every year. In the credit reports that I have personally looked at, there were errors in over ninety percent of them. As stated before, this can result in thousands of dollars.
 

What exactly determines a consumer's credit score?

1. How you pay your bills (35 percent of the score)
The most important factor is how you've paid your bills in the past, placing the most emphasis on recent activity. Paying all your bills on time is good. Paying them late on a consistent basis is bad. Having accounts that were sent to collections is worse. Declaring bankruptcy is worst.

2. Amount of money you owe and the amount of available credit (30 percent)
The second most important area is your outstanding debt -- how much money you owe on credit cards, car loans, mortgages, home equity lines, etc. Also considered is the total amount of credit you have available. If you have 10 credit cards that each has $10,000 credit limits, that's $100,000 of available credit. Statistically, people who have a lot of credit available tend to use it, which makes them a less attractive credit risk.

 

3. Length of credit history (15 percent)
The third factor is the length of your credit history. The longer you've had credit -- particularly if it's with the same credit issuers -- the more points you get.

4. Mix of credit (10 percent)
The best scores will have a mix of both revolving credit, such as credit cards, and installment credit, such as mortgages and car loans. "Statistically, consumers with a richer variety of experiences are better credit risks," Watts says. "They know how to handle money."

5. New credit applications (10 percent)
The final category is your interest in new credit -- how many credit applications you're filling out. The model compensates for people who are rate shopping for the best mortgage or car loan rates. The only time shopping really hurts your score, Watts says, is when you have previous recent credit stumbles, such as late payments or bills sent to collections.
The scoring model doesn't look at:
·         age
·         race
·         sex
·         job or length of employment at your job
·         income
·         education
·         marital status
·         whether you've been turned down for credit
·         length of time at your current address
·         whether you own a home or rent
·         information not contained in your credit report

A lender may consider all those factors when deciding whether to approve a loan application, but they aren't part of how a FICO score is calculated.

The major drawback to credit scoring is that it relies on information in your credit report, which is quite likely to contain errors. It has been my experience in the credit reports that I review, more than 90% of them contain errors of some kind. That's why it's critical that you check your credit reports annually. The need for accuracy in credit files is one reason why it's good for consumers to know their credit score and they'll do more to correct errors.

If you're thinking about buying a house or a car, or obtaining credit of any kind, your credit score is a very important number. The interest rate you'll pay for the money you borrow will be determined, in large part, by this three-digit number that's generated from the information in your credit report.

You can take steps to improve your credit score. The number of variables that play into an individual score make it impossible to say that one particular action will increase a given score by a certain number of points. But there are some good guidelines, such as paying your bills on time, keeping account balances low, and taking out new credit only when you need it.

Start by pulling your credit report and your credit score to see where you are. This is the same advice I would offer someone that was looking for travel directions. If someone was to ask "how to I get to such and such a place" my answer would be "where are you now?"

What you're looking for on your report are factors that could be affecting your score. Look for errors in the report, such as accounts that aren't yours, late payments that were actually paid on time, debts you paid off that are shown as outstanding, or old debts that shouldn't be reported any longer (negatives are supposed to be deleted after seven years, with the exception of bankruptcies, which can stay for as long as 10 years).

After eliminating any errors, the fastest route to a better score is paying down balances on credit cards. I would say that over 60 days, it's possible to increase your score 20 points by paying down your credit lines.
If you find yourself in some financial difficulties, you can protect your score by making sure your payments don't go 60 days past due. Some lenders don't report 30 days past due, but they all report 60 days past due. Forget about grace periods, if you want to have a really good record with the credit agencies, pay your debt before it's due and keep your balances low.

One thing you shouldn't do if you're just trying to boost your score is close unused accounts. It won't help you at all and it can hurt you. Closing unused accounts without paying down your debt changes your utilization ratio, which is the amount of your total debt divided by your total available credit.
The length of your credit history is another factor in your score. If you close the account of the credit card you got when you were a freshman in college and leave open the ones you just got within the last couple years, it makes you look like a much newer borrower.

Another strategy for bringing up your score is to transfer balances from a card that's close to being maxed out to other cards to even out your usage or just spread out your charges between a few cards. Try to get the usage on all of them at 20 to 30 percent instead of a bunch at zero and one at 80 percent.

Check your credit report to see what day of the month your creditors send updates on payments to the credit bureaus. They're rarely on the same cycle as your payment due date. That's why you can pay off your card every month and your credit report will show you carrying a balance. Then, make your payments several days before the reporting date.

If you need a score boost in a hurry, you can speed the process along with rapid rescoring. If you've got legitimate negative information on your credit report, such as late payments or accounts in collections, you're out of luck. But the process of rapid rescoring can help increase your score within a few days by correcting errors or paying off account balances.

You can't do this one yourself; you'll need a lender who is a customer of a rapid rescoring service. Generally, the service will run roughly $50 for every account on your credit report that needs to be addressed, but it could save you thousands on your loan. If a consumer can find a lender who is a customer of a rapid rescoring service, new information can be posted within 72 hours.

All of these strategies generally take at least 30 days because lenders don't report payments more than once a month.

The bottom line is that you're not powerless when it comes to your credit score. There are a lot of things you can do to improve your score. You need to understand what your credit is like now and what's influencing your score today.

Then you can take an objective look at the different options available.
If there is one question I'm asked by consumers more than any other about credit, it's this "What's the fastest way to raise my credit score?". My response is always the same "How much do you want to raise it?"

If you wish to increase your score from 580 to 650 then your strategy will be very different from someone wanting to go from 670 to 725. Why? Because you starting point is different which requires a different approach. Also, while the removal of negative items from a report will almost always lead to an increase in score, it's a basic concept at best. Therefore, within this article, we'll discuss somewhat inside techniques known by very few (since this is what our company specializes in publishing).

In relation to just removing negative items, these are techniques which you can use even if you have NO derogatory information on your credit report. We'll start with the most overlooked strategy first and that's your DEBT to CREDIT RATIO

One of the most common misconceptions that I've been hearing for over 17 years is "I have excellent credit, I pay all my bills off in full every month!" This is a false belief for one to buy into and understanding your debt to credit ratio holds the key to getting your "credit mindset" right.
Your debt to credit ratio is your ratio of debt to total available credit you have been extended (revolving accounts only).

For example. If you have $10,000 in total unsecured revolving credit accounts and you're currently in debt $2500, then your debt to credit ratio is 25%. Since the main way lenders make money is by charging interest, one of the elements of the credit scoring model is driven by your ability to maintain balances and pay over time. This shows your true (long term) credit worthiness which is most profitable to lenders since they make money primarily via interest and not annual fees.

Over the years we've discovered without question that carrying the proper debt to credit ratio will boost your score faster than paying off your bills in full each month. I have argued with the Better Business Bureau on this topic for and they still disagree (despite my sending them proof from Fair Isaacs own website www.MyFico.com the organization which invented the credit scoring software used by credit bureaus).

Of course, what do you do if you're like most Americans and your debt to credit ratio is too high? For example. You have $10,000 in unsecured revolving accounts but you owe $8500, thereby giving you an 85% debt to credit ratio. How can you bring it down without selling everything you own? The answer is simple and takes us to the next technique which is SUB-PRIME MERCHANDISE CARDS

The single most cost effective and powerful tool for consumers to increase their high credit limit and decrease their debt to credit ratio is the use of Sub-Prime Merchandise Cards which report to one of more of the major credit bureaus.

Unfortunately, despite their immense benefits, these are the most misunderstood cards in the credit industry. A large portion of the misunderstanding is due to marketers misrepresenting the cards and the growing number of companies promoting them. When you learn how they work one quickly understands why they have been the subject of much misrepresentation.

A Sub-Prime Merchandise Card is nothing more than a card attached to a line of credit which allows you to buy merchandise from a specific vendor (usually the company that sold you the card). The merchandise (in most cases) will be purchased through a catalog or online mall.

Where the problem arises is that the cards are marketed almost exclusively to the sub prime market via email, telemarketing and direct mail etc. The reason for this is they can advertise almost irresistible offers like "$5,000 Credit Card... GUARANTEED! No Credit Check! NO Cosigner! You cannot be turned down!" or "Unsecured $10,000 Credit Line! Everyone Approved!". I'm sure you get the idea...

While there are many companies which do this and are a "shady at best", there are a few which do it legitimately and it's the best kept secret to build your credit and build it fast.

Here's how it works: the company approves anyone with a pulse and gives them a card for $2,500 to $12,500 with NO credit check and NO cosigner. However, the card is only good for merchandise through their website or catalogs and the consumer is required to put down a deposit on whatever they purchase. After the deposit is paid, the remaining balance is financed on the card.

For example. A person buys $1,000 worth of merchandise. Their deposit is $300 so they then finance $700 on their merchandise card and make payments. Sound like a scam? If you say "Yes" like most people then you're missing the point... big time.

With a legitimate Sub-Prime Merchandise Card your credit line WILL be reported to at least one major credit bureau (or more). This means if you get a $5,000 card and you finance $500, on your credit report it will look like any other credit card and will do three extremely important things for you.
1.) It will increase your current "High Credit Limit" by $5,000 almost overnight as the account "looks" like any other unsecured revolving account.
2.) By carrying a small outstanding balance it will positively impact your credit report by building and showing potential lenders your credit worthiness.
3.) With a good payment history you are virtually guaranteed to receive "legitimate" pre-approved credit offers in the future due to other lenders renting your name from the credit bureaus.

This technique is hard to beat for both cost and effectiveness. Of course, the whole key is knowing exactly which cards report to the credit bureau and offer the best rates. The only thing more effective is PIGGYBACKING.

Despite its' virtually unlimited potential, piggybacking is not used by nearly as many consumers as it should be. It's easy, effective, and extremely fast. Unfortunately, it's mostly used among parents and siblings while those who can really benefit stay in the dark.

How it works. Almost every credit card or credit account will allow the primary account holder to add on (at a later date) what's known as an "Authorized User" or "Secondary Account Holder". In most cases, when this is done, the entire account history (retroactively) gets posted to the authorized users credit report regardless of their current age or credit history!

For example. If it's a credit card with a $10,000 limit which has been paid as agreed for the last 10 years, then that complete history will be posted to the authorized users' credit report. I once saw a clients' credit report who used this technique with his mother. He was only 24 at the time and he had a $15,000 Gold credit card on his report with history going back 11 years! I laughed as I thought to myself that this kid would have had to be approved when he was 13 years old for this account to be his!

As you can see, this strategy is usually only used by parents and their children and in most cases with no regard to the benefits the children are reaping credit wise! In fact, in recent years, due to its' effectiveness, this technique has led individuals with excellent credit scores to "rent out" authorized user accounts on one or even multiple credit cards in return for a fee! I once recall seeing an ad in USA TODAY for just such an opportunity. Like most good credit loopholes, I'm sure this methods' days are numbered much like what may be the case with ADVANCED CREDIT PROFILING
 This is a strategy while not complex, can be taken to very complex levels. Even in its' most basic form, it's taken advantage of by very, very few. It involves intentionally building your credit report in a way which creates a "profile" that closely fits the criteria of most lenders (as well as the overall credit scoring system). Again, this is a technique which can be used in a myriad of complex ways, but for simplicity I will explain it in its' most basic form.

While many consumers will boast when they have 10, 20, 30 or even 50 thousand dollars worth of credit cards on their report, many of these same people do NOT have even one mortgage, automotive loan or lease, equipment loan or a even a line of credit with a local bank or credit union. These other forms of credit create a much more well rounded credit profile for the consumer. This is achieved by showing greater credit account diversity and experience with multiple types of credit due to the various lines held.

For example. A person with $50K in credit cards does not represent near the credit experience as a person with the same $50K along with a mortgage, an automotive loan and an equipment lease. We have clients who have financed vehicles not because they had to (or even wanted to) but because they "needed to" in order to create a credit profile that would position them in the future to secure the lowest possible rate on a mortgage when they applied and needed it.

More complex forms of Advance Credit Profiling involve one subscribing to affluent or semi-affluent business and professional publications and organizations. These would include magazines, newsletters, trade journals and national associations. The goal is to get ones name into the databases of these publications and organizations. Why? To get on highly targeted lists in order to receive select credit offers.

Marketers of credit offers have found that simply renting names of consumers from the credit bureaus does not provide enough information about the person as a credit risk anymore. Therefore, it is speculated that many will rent a list from the credit bureau and then cross-reference this list against another list they have secured from a consumer source such as an affluent business or professional publication, trade journal or organization.
 

By crossing the two lists together the marketers find the names contained on both lists. This in turn provides them with one highly refined and targeted list to mail their offer to. This results in shortening the process of securing a new quality account holder thus lower the overall account acquisition cost of new accounts.

When a consumer learns how to intentionally put themselves into these databases to wind up on these refined lists, the credit building process is sped up exponentially. Of course, many would call this "highly speculative" but we have undeniable experience that it works.

DEPOSIT LOAN PROGRAMS is a technique so unbelievable that I myself proclaimed it had to be a scam before researching the facts. It allows the consumer (or business) to have a $25,000 to $250,000 loan appear on their credit report as "Paid as Agreed" by way of very creative financing.
This method is extremely effective and not within the budget of most ($750 to $7,500 upfront). Also, because this technique takes advantage of certain banking laws, I have reason to believe it could be made unavailable at any time if those banking laws were to change. This method can be used with consumer credit files on SSN's as well as business and corporate credit files done on TIN's as well as Dunn and Bradstreet.

In the end, all of us need to remember that today our credit score is more important than it has ever been in the history of the credit reporting system. While credit miracles don't happen overnight, you can create your own credit miracles by applying simple insider strategies consistently over time.