Five Ways to Help Your Credit

Get a credit card and keep it at 10% balance to limit ratio to maximize scores.

If your card limit is $500, the best balance to keep it at is $50 to maximize your credit scores. Credit cards are extremely important and account for 30% of your credit score.  Without an active credit card you missing a gigantic portion of your score.  At 0-7% balance to limit ratio, it is bad for your credit because the algorithm will believe there is a lack of recent revolving credit.  7-10% balance to limit ratio is the perfect balance to have without hurting your score.  10-30% utilization will make you lose 0-10% of your amounts owed/credit card section of your score.  A 30-50% utilization will take away 10-25% of your your amounts owed/credit card section of your score.  At 50-90% utilization it is like a drastic upward belt curve and eats anywhere between 25-90% of your amounts owed section.  Above 90% utilization, you are really killing your score and need to try to pay it down immediately to boost points.  Luckily credit cards update monthly and you can swing 100 points by paying maxed out credit cards down to 10% utilization in just a month.

Keep your old credit cards open forever

Whenever you close out old credit cards you are taking points away from your length of credit history.  Credit history is an average of all your open and active accounts.  Whenever you pay off a car loan, student loan, or home loan those accounts become inactive and are not calculated into the length of credit history.  The only accounts that will remain open forever are credit cards.  Make sure you use them at least every 6 months to make sure they do not become inactive.  If you ever come back to use a store card and they say they need to run your credit again since you haven’t used it for a while, think twice before you allow them to run it.  The reason is because running that credit will cause an inquiry which can cause 2-5 points deducted from your credit.  It will also cause a new credit ding of 42 points that you will slowly gain back after 90 days.  On top of losing all these new credit points, your account will be brand new and not seasoned.  This is why it is very important to use them every once in a while to keep them active.

Close out newer accounts

If you open up Macy’s or Kohl’s cards to save 10%, you can be dragging down your score drastically.  If you have a lot of old credit cards and a couple new credit cards, just simply close down the new credit cards to boost your length of credit history.  15% of your score is based off the average length of all your open and active accounts.  When you introduce new accounts it adds zero year accounts to the profile causing scores to drop significantly.

Piggy backing or Authorized Users

By adding onto relatives or significant other’s credit cards as an authorized user, you can gain a ton of credit history.  Just make sure the account has low utilization, open for a long time, and no late payments attached to the account.  You do not want to add too many accounts, because underwriters will flag that down if you are applying for a large loan by yourself.  If you have a lot of authorized users and they are on your significant others accounts that you are co-applying for accounts, then you are fine.  If all your accounts are authorized users and you alone are applying for large loans it shows to them that you have no credit that you have built up by yourself.  The most you want is 1 authorized user to every 4 accounts.

Stay on top of your bills and make sure you pay on time. 

Paying your bills on time is by far one of the most important things in building credit.  It shows everyone you have the ability to repay debt.  If you have an 850 credit score and you get one 30 day late, it can drop your score to 700.  So make sure you pay on time!  If you came back up to date next month you can achieve a 790 score, and it will start to ween off and bounce up over time.  However, you will never achieve a perfect score as long as that late is leftover on your credit score.  It will stay on lingering for seven years, so that is why it is very important to pay on time.

Five Ways to Hurt Your Credit

Paying off collections

I know it doesn’t make sense that you are punished for doing the right things…but unfortunately we don’t live in a perfect world and you are not rewarded for doing the right thing.  A collection that is six years old and hasn’t reported for six years is only down your score 10 points.  When you pay it off, it will push forward the reporting date to today and will still be coded with a 9 coding which means it is a collection.  So doing the right thing can drop your score 40-50 points, rather than leaving it alone and only holding down the score 10 points.  When they tell you that they are going to put it as satisfied, good standing, and paid in full, none of this helps increase the score.  They use these strong adjectives to make you feel like you are going to increase your scores, rather than hurt it.  The best you can do is try to leverage your payment for a deletion letter.  Ask for the deletion letter before you pay to make sure that they will provide it.  If they can’t provide one ahead of time, let them know that if they don’t provide a letter of deletion you will negate your payment.   Unfortunately only 30% of companies will provide letters of deletions and calling on them can cause your collection to update.

Cosigning on items

A lot of times the banks will let you know that cosigning isn’t that bad and they hold the original borrower more responsible.  That is false and you are just as liable for the debt as the original borrower.  So try not to take the risk cosigning for a family member, because it can end up costing you your credit score.  By far this is one of the biggest mistakes people make, trying to help someone out by cosigning.  If you do not stay on top of a bill that you are expected to pay can cause them to default and pursue judgements against you.  You can never fight the creditor to correct the credit due to negligence on the other party because you are supposed to be monitoring all of your accounts.

Divorce Decree

Unfortunately a divorce decree does not have to be honored by creditors or collection companies.  Even if the judge stated that your ex is responsible for the debt that does not protect your credit.  The best thing you can do is have your ex refinance all the items the judge gave them, to remove your name from the loan.  You can sue your ex if you start to see late payments and collections on your credit report, but you are not going to get very far suing someone who cannot pay their bills and your credit will be shot in the end.   If the person awarded the house does not have an income, there is no possible way for that one person to refinance the property into their name.

Financing a car at a dealership

Dealerships will shotgun your information out to the auto finance companies.  Sometimes going to one dealership can cause 20 inquiries on your credit report which can cost you upwards of a 42 points loss on your creditreport.  The best thing you can do is go to a credit union or bank and try to get prequalified for a loan.  This will only be one inquiry and you will be able to take the pre-qualification into any dealership and get the same car without having to ruin your credit.  Always try to negotiate the price before you tell them you are handling the financing yourself.  They will try to charge you more if they know that you are financing yourself, because they make money off of the financing as well.

Paying Cash for Everything

The old fashioned saying is, “If you don’t have the cash for it, don’t buy it!”  That saying is great and I do agree with it…the only problem is that the credit bureaus don’t understand that.   If you do not finance anything, you will never be able to achieve a credit score.  Instead you will come up with no score at all.  In order to have a good credit score, you have to live some debt and manage it correctly.   Also the best thing is to keep a good mix of accounts.  3 installment accounts and 3 credit cards is the best mix to have.  Installment accounts are considered home, auto, and student loans.  There are a lot of people who have paid cash their whole life and because of inflation they now need to borrow money.  This is probably the most frustrating thing about credit because these are the most well qualified people without a credit score.