Wealth Building Lessons

Your credit score is the single biggest factor in dictating the financial aspects of your life. Your credit score, or FICO score as mortgage lenders like to call it, can be the difference between getting a good home loan (or getting the loan in the first place) and having low payments or being stuck with high mortgage payments. A higher monthly payment means you qualify for a smaller loan and results in you buying a cheaper (and probably smaller) house. With the recent implosion of the sub-prime market, lenders are tightening their standards and its becoming more difficult for people with bad credit to get loans. This makes it even more critical to improve the magic number. From a wealth building perspective, its also important as it provides you with a wider range of options when making financial decisions.

So what does the credit score number mean? Its a numerical index which represents an estimate of your financial creditworthiness. It’s based on a subset of information in your credit report. Lenders will then use this number to determine your credit limits and interest rates.

The exact formula to calculate your credit score is a closely guarded secret (sort of like how Google hides how their search engine algorithm works). If they revealed the secret, people would game the system to make themselves look better in the eyes of the lending institutions. However, there are a few things that we knoware part of the equation.

These include your payment history (i.e., how often you pay your bills on time), which makes up the biggest chunk of your score, the amount of debt you owe, the amount of time you’ve had your credit cards and how much new credit you have applied for in the last 12 months. You want to aim for a score in the 700s to get more favorable loan terms. Scores above 720 are considered Prime, and get the best rates. The national average, according to Fair Isaac, is a FICO score of 723.

So how do you improve your credit score if it’s not where you want it to be? Here are some simple strategies you can put in place.

1. Pay off your debt
One of the fastest and most efficient ways to improve your credit score is to pay off the high balances on your credit card. This could improve your credit score by 60 to 70 points. Credit bureaus use this information to predict how much of a credit risk you are by how you handle credit card debt. They pay particular attention to credit card debt more than any other kind of debt, such as student loans, because with installment loans, like mortgage payments, there is a predetermined amount you pay each month. With credit cards, you’re in control of what debts you have.

2. Maintain low balances
Make sure you never charge more than 50% of your credit limit to any credit card on any given month. The credit bureaus look at the amount you pay on your credit card regardless if you pay your bills off every month. Not following this principle could hurt your credit score by as much as 60 or 70 points. What do you do if you have to go beyond the 50% threshold? Try to plan the expenses around the payoff date or spread the charges across several different credit cards to keep the balances down.

One trick I tried was to boost my card limits. I had a $3,000 limit on the one card that I used a lot. Every month I’d charge about $1600-$1750 on it and pay it off. It looked like I always had a balance of over 50%. I called them up and asked them to increase my limits to $50,000. (The customer service rep almost snickered when I made the request). Anyway, I got a denial but they did bump it up to $12,000 which pushed my credit balance to under 25%. Almost immediately my credit score jumped from 680 to 720. I’m sure if it was the only reason it jumped, but nothing else changed during that time period.

3. Keep those older cards
Since the credit bureaus look at your overall credit history, specifically how long you’ve managed your credit, make sure you keep your older credit cards. Many people that consolidate or reduce the number of credit cards they carry make the mistake of closing their older accounts. Instead, you should focus on keeping the older credit cards and eliminating newer ones and/or refraining from opening new lines of credit (unless absolutely necessary) regardless of the type of card as this will most certainly lower your score by at least a few points. From a credit worthiness standpoint, three or four accounts is all you need and is sufficient for building excellent credit.

And stay away from those store credit cards. They usually have low limits and make your credit score look really bad.

4. Correct Mistakes
Make sure you review your credit reports from time to time as it’s not uncommon for errors to be reported. One of my friends recently noticed noticed through his credit monitoring service that his credit score had dropped about 100 points!!! Looking at the details saw a “Late payment that became derogatory” from Verizon Wireless. It turns out that an account he had closed out and transferred to his business was not closed out properly and the outstanding balance had not been charged properly to his credit card. This lead to an outstanding balance with the bills being sent to an old business address, being flagged as overdue and then later sent to a collection agency.

After several lengthy calls to Verizon, he was finally able to speak with someone that was in a high enough position to be able to resolve the issue by promising to send letters to all three credit bureaus stating that it was their mistake and to remove the entry from my credit file. If everything proceeds as expected the bad entry should be removed from my credit file within the next 60 days and his credit score should jump right back to where it was before the incident.

He’s pretty lucky to have been able to resolve this issue in such a short time frame. Its during incidents like this, that you appreciate having a credit reporting service. If you don’t already subscribe to a credit monitoring service, go sign up for one right now!! I use Equifax Score Watchand it’s only $12/month. Every time, there’s a change to any of your credit reports, you get an email within 24 hours. Believe me, it’s worth it. Identity theft is rampant and the average time and money spent trying to restore one’s credit from a stolen identity is about 10 months and $1,500 respectively.

Alternatively, you can order a free credit report (you are entitled one per year) from any of the three credit bureaus (Equifax, Experian and TransUnion). If you want to track your credit more frequently, and I highly recommend it, you can purchase your credit report directly from the credit bureaus online, my mail, or in some cases by phone for about $10. Also, If you have recently been denied credit you are eligible for a free copy of your credit report.

Lastly, you might want to consider credit repair. If you can boost your credit score from 580 to 720 (like one of my friends did) you suddenly go from having 28% APR credit cards to getting 0% APR credit card offers! When buying a home, getting a prime rate versus a sub-prime rate can save you hundreds of thousands of dollars over the lifetime of the loan. Thats definitely worth a few hundred dollars.

Related Products:
1. LifeLock Identity Theft Prevention
2. Credit Repair
3. Get Equifax Score Watch Now!
4.Increase Your FICO Score

Related Books:
1. 7 Steps To A 720 Credit Score
2. Dirty Little Secrets: What the Credit Bureaus Won’t Tell You
3. Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future

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