Paying Off Account Balances

Less could be more in the credit scoring system. To have less, means having fewer accounts with a reporting loan balance, not lessening the number of accounts you have overall, unless necessary.

When you have an excessive number of loans with balances, whether they have a $10,000 or $10 balance, they all can count towards your credit score. Look to consolidate accounts when you can, and pay off those accounts with small balances.

However, it is crucial not to start closing accounts once you have paid them off. Keep them open and use them occasionally so they won't go dormant.

Recognizing Critical Credit Ratios

The credit scoring system measures your reported credit limits, on lines of credit such as credit cards and merchant accounts, to the balances that you currently have. Except Capital One – or CapOne, or Capone as they are known in the industry.

Capital One reports your high balance as your credit limit!!! That means if you have a credit balance of $500 on a $10,000 limit card, but they are reporting that you only have a credit balance of $500 – it appears as though you are maxed out on your card. Be very cautious of this!

The system also looks at how much you have paid down on your loan balances in relationship to the initial loan amount. Lowering the ratios is critical to raising your credit scores. If possible, pay extra to lower your balances on credit cards and your installment loans each month.

Paying Obligations On Time - A No Brainer!!!

This is the most important factor of the Five Factors to Credit Scoring – Making your payments on time.

Most consumers think that just making timely payments is the sole reason a credit score increases, which is not the case. The credit scoring system is much more complicated than just making payments on time.

However, making timely payments on all your loans and credit cards is the master key to raising your credit score. Without it, the other strategies are less meaningful.

If you have a perfect record, great job! Keep on track.

If you have had issues in the past, address them now, and make every effort to make payments on time going forward.

Establishing Cash Reserves To Preserve Your Credit

Before you take out any loan - especially a mortgage, you should have a cash reserve already established. Most lenders require a 2 to 6 month reserve.

No one knows when there may be an accident, a loss of a job - especially in today's economy, health issues, or another unfortunate event. You need to establish a cushion so that you can offset any decline in income should it happen.

If you are taking out a new loan to cover your expenses until the next pay check, like a pay day loan, you are in serious trouble. Before you incur any debt, set aside a sufficient cushion that can be readily accessed in case trouble arises.

If you start missing payments on your mortgage, car loan, or credit cards, you can watch your credit score tank faster than the Titanic.

Creating Depth With Your Credit Score

Everything goes back to the Five Factors of Credit Scoring.

Depth, or length, is created by how long our accounts have been open. Depth with your accounts determines how high your credit scores can go. Review your credit file and identify how long your accounts have been open. Higher scores will be realized when most of your accounts have been open for at least four years.

THE OLDER THE BETTER!

Opeing New Accounts

Once you have an established credit profile, try to avoid opening new accounts at every opportunity. Opening multiple accounts within a 12-month period can be extremely detrimental to credit scores for two reasons.

The first is applying for new credit will show inquiries on your credit report. Secondly, a new loan will add risk and could lower your credit scores.

You should pay particular attention to the number of loans you have opened in the last year. Try to space new accounts out to avoid sudden declines in your credit scores.

Two factors of new accounts are determined by the Five Factors of Credit Scoring.

Establishing Quality Loans on Your Credit Report

Some loans are considered more valuable than others, such as a mortgage. This type of loan usually shows that a person is more responsible. The credit scoring system requires a minimum amount of activity on these accounts for revolving – such as a credit card – and installment loans – like a mortgage or an auto loan.

The activity on a mortgage or auto loan is not as critical as a revolving account because you make those payments regardless every month versus a credit card that can be put into a drawer and not used for months and months. In order to keep your credit card accounts active you should use them at least every 6 months so they won’t go unrated or become an inactive account.

You should have some payment activity from both types of loans – it is critical to raising credit scores.

This tip goes back to the Five Factors of Credit Scoring.

Holiday Shopping Alert!

CONSUMERS: SHOPPING SPREE OR SHOPPING ALERT

I will get back to the Top 10 Credit Building Tips on the next post. There is a Holiday Shopping Alert you should be aware of:

Buying on credit. Financial experts say that those who shop with credit cards tend to spend as much as 30% more than if they'd shopped with cash.

The reason: When you shop with cash, you're more aware of how much you spend and how much you have left because you can touch it. And once the money's gone, it's gone. The best thing you can do is set a holiday budget.

Plus, if you have to put the purchase on your credit card or sign up for the store's financing, you simply cannot afford it and it could damage your credit without you even knowing it! Any good deal you thought you were getting will be eroded by the interest you'll accrue and the time you'll spend as a debt hostage. About 12 million Americans are still paying off last holiday's bills, according to Consumer Reports.

Quality Lenders and Your Credit

Did you know that lenders are scored differently on you credit report?

Many consumers fail to realize that credit scores give differing values for different types of lenders. Banks and national credit card companies are on one end while finance companies and payday lenders are on the other end.

Most can identify a bank, but many fail to recognize finance companies. Such lenders usually finance many auto loans and merchant purchases offering “Same-as-Cash” options or "No Payments 'Til 2020.

Many finance companies are even owned by banks; but, they are considered high-risk lenders and create a drag for credit scores because of their willingness to charge high interest rates and lend to less than credit worthy consumers.

If you have good credit, utilizing one of these lenders to save money on interest can be a good decision. The choice is up to you, and the result to your credit report is up to the bureaus.

Golden Accounts

This is the second tip (The First Tip) from the news report. I find this one a little obvious but needed to touch on it and give some more information on how to create a “Golden Account.” This post is going to be filled with links as I have touched on all of this before.

A Golden Account is any account you have that remains open for many years (ten or more) and can drive credit scores to higher levels. This basically goes back to the Five Factors that make up a credit score.

The only way to create a “Golden Account” is to open one up and then wait. And wait. And wait some more. OR…

You can piggyback off of someone else’s “Golden Account.” FICO ’08 will only partially eliminate an authorized user, or piggybacking.

Once such accounts are identified, leave them open and periodically use them. NEVER EVER NO MATTER WHAT ANYONE TELLS YOU – CLOSE AN ACCOUNT.

You need to use an account such as a credit card at least once every 6 months so the card doesn’t become inactive or go dormant.

Know Your True Credit Scores

I recently saw a news report on a lady who raised her credit score over 100 points in less than 3 months. I wanted to address what the news was telling people to do - as they usually get things WRONG and mislead us all into doing what we shouldn't do.

This news station actually got things right for once!!! They had a Top 10 list and so I will address each item in a different post. The first will be...

Know Your True Credit Scores and Reason Codes.

There are really only two ways to know what your actual credit scores are. The first, is to have a lender pull your credit which will show up as an inquiry on your credit report. And the second, is to go to myfico.com and pay to get your credit scores.

Keep in mind that the scores from myfico.com and the ones pulled from a lender will not be the same, but should be pretty close. Consumer credit scores pulled online are considered educational and are different from those used by lenders.

The reason codes provide valuable information by which you can identify problems affecting your credit score. They are the road map to improving your credit.

Mortgage lenders are required to give you a copy of your credit scores and usually the reason codes that go with them. Myfico.com only provides generic explanations of problems impacting your credit scores.

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Could Black Friday = Lower Credit Scores

The day has come...and now it is gone. Black Friday is over and we should know what impact it will have on consumer confidence in the next few days.

Dubbed "Black Friday" in reference to red ink representing loss and black ink representing gain, today's start to the Holiday Shopping season is believed to be the day that retailer balance sheets finally cross over to profitability.

Here is what we know already. Black Friday is of special significance this year because consumer spending accounts for two-thirds of the U.S. economy. Spending was up 7% this year over last year with the average consumer spending $372.

Americans are shopping in full force, and we can expect economic optimism and a mild rebound in the stock market. Unfortunately for home buyers, this should also lead mortgage rates higher.

By contrast, if sales figures are weaker than predicted, we can expect talks of a recession to grow.

So what does this mean for you?

If you went out and bought gifts with you credit card you could be paying off those Black Friday deals well into the next holiday season.

Here's an eye opening example...

If you were the average consumer and spent $347 on your credit card, at a national average interest rate of 12.82%, and made only the minimum monthly payments...IT WILL TAKE YOU OVER 3 YEARS TO PAY OFF THAT DEBT!


What does this mean for your credit score?

In order for this example not to affect your credit score - you would need a available credit balance of $3,100 so you stay below the 10% mark. Calculate your debt to credit ratio by dividing your current balance by your available credit limit.

Anything over 10% could mean trouble for your credit score.