Building Credit

[copperhead]

EDIT - I'm not thrilled with how this turned out. Eventually I want to rewrite this, but for now I'm de-stickying it.

 

Disclaimer - I am not a financial expert, nor do I play one on tv. I'm just someone who has made a couple mistakes and learned from them, and have done tons of research along the way. There have been plenty of people on here asking for how to improve their credit so I figured I would write this up. If anyone wants to add something or correct something reply below, but due to the amount of rumors, hearsay and voodoo attached to how credit works please back it up with links. Everything here is accurate to the best of my knowledge at the time of writing, but things change all the time. The way the 3 major credit groups (Experian, Equifax and TransUnion) rate credit isn't totally public knowledge but they have shared a lot of it.

 

The point of this write up is for the person who wants to go from having a low to average credit score to being able to buy a house. If you are looking for a business loan I can't help you, please talk to a financial adviser. If you are looking for a car loan talk to a loan officer at a credit union or whatever bank you have a strong history with, as car loans have far lower requirements than a house. Although, I personally would recommend the Dave Ramsey approach to car purchasing; I plan on never having a car loan again. I've been driving a $500 beater for the last ~9 months and I am going to push it as far as I can until I can save up for something better. Assuming you don't have too much debt to get paid off, I would expect to take about two years to allow your score to heal, along with saving up some money for a down payment. This is also due to it taking two years for credit inquiries (applications) to roll off. Large amounts of debt will simply make it take a bit longer, but of course every situation is different.

 

Keep in mind that buying a house is one of, if not the biggest financial decision you can make in your life. You don't want to rush into anything you aren't sure of or won't be happy with down the road. Don't jump at something just because it appears to be a great deal; often times what looks like a great deal at first turns into a disaster later.

 

Understanding Credit

 

Credit is a measure of trust between you, the borrower, and the bank that you borrow from.

 

First off, here is the breakdown of the mystical credit score:

 

Between 700 and 850 – Very good or excellent credit score.

Between 680 and 699 – Good credit score.

Between 620 and 679 – Average or OK score.

Between 580 and 619 – Low credit score.

Between 500 and 579 – Poor credit score.

Between 300 and 499 – Bad credit score.

 

The goal is to get you above 700, once past there you will get approved for just about anything so long as the income to debt ratio works out, and sometimes even if it doesn't.

 

There are many places to pull your credit report from, most of which will try to sucker you into signing up for a credit monitoring service that you have to pay for monthly. Pass on that. The best way to get your full credit history and credit score is to pull it directly from the Big 3, Equifax Experian and TransUnion. Last I checked they charge about $9-$15 each and its totally worth it. There is also a free government site that will pull your history once a year but does not give you the credit score so to me its not all that helpful. The credit report should list all open lines of credit, loans, and any negatives you may have. Checking this once or twice a year is also a good way to watch for identity theft.

 

Also, you can get a FAKO score (nickname for an imitation FICO score) for free from http://www.creditsesame.com/ and https://www.creditkarma.com/[/url

 

I believe Credit Sesame pulls your info from Transunion and Credit Karma from Equifax. I use them both and they are pretty slick. It looks like their way to make money is through referrals for signing you up for credit cards and mortgages. It's a legit site though, and offers some very valuable information. This, added with the free credit history pull from the government site should give you a complete picture of where you are at. Credit Sesame offers a credit monitoring service that is free and worth using. Neither service will give you your real credit score but its not far off, and it can show you how you are trending.

 

There are many things the Big 3 look at, some examples are debt to income ratio, balance to credit limit ratio, average length of history of open accounts, accounts opened within the last two years, number of inquiries in the last two years, charge offs, late payments, bankruptcy, marriage, divorce, employment, and other things. Credit scores can change daily, but changes usually only post once a month.

 

Here's an image I found that show's roughly what percentages make up your credit score.

 

http://i412.photobucket.com/albums/pp201/copperhead035/Business-Credit-Card-Credit-Scores_zpse12c5167.jpg

 

Pic from myfico.com

 

Cleaning up the past

 

The first thing you need to do is wipe away the mistakes you have made. If you have any outstanding debt come up with a plan to make it go away. Pay off or sell cars, pay off all credit cards, any unsecured loans, student loans which never seem to go away, and whatever else you may owe on. If you are looking to buy a home these things WILL bite you in the ass if left unchecked, its simply easier to deal with them before you are locked in for the next 20-30 years. If you can get things paid off within a couple months then go for it but if you are stuck with high interest credit cards or some other high interest payment look into a 0% credit card. I have a Citi Diamond Preferred card and like it, as they occasionally send me checks I can write to myself or anyone else that offer 0% for a year or .99% for a year and a half, and work just like I swiped my card. Generally 0% cards will do balance transfers for 3% which is way better than paying 17% (or more!) APR for a year. Just read the fine print before applying for a card to see what happens after the introductory time runs up. Now, you want to get everything paid off as soon as you can, because you shouldn't try to move on until that happens. Paying everything off will help your debt to income ratio and balance to credit limit ratio so just doing this will help your score. Supposedly leaving a running balance can help your score but I'm of the opinion that paying interest every month hurts you more than the bump might help you, so just pay it all off. Never hand out money for nothing, especially for interest and fees, as that same money can be going into a money market account to make you money, but more on that later. Do not cancel credit cards unless they have high fees or have a limit under $1,000, as low limits hurt your ratios. Having more unutilized lines of credit helps. Never cancel the card you have had the longest. Use old credit cards once a year and pay them off as soon as you get the bill so they don't get canceled from lack of activity.

 

Once you are on the right track for paying off debt, its time to clean up negatives on your credit history. If you have a bankruptcy its two years before anyone will offer you any credit and seven years before it drops off. There is no way around this, so sell everything you can before you make it to this point to try and avoid it. If you have already gone through bankruptcy, then its a waiting game but you may as well do what you can to build back up while waiting. Other negatives can be charge offs which is where you make a deal to pay a lower amount of money to make a debt go away, and defaults which is where you simply stop paying on something. If these show up there should be a phone number listed for whoever put it there - call and simply ask for them to remove it from your credit report. Some might do it, but expect for them to want something in return so be prepared to work with them. If you are serious about fixing your credit then make a deal with them and follow through.

 

The Big 3 also have helpful information on their websites.

 

Building for the future

 

Now that the ugliness is looking better its time to move on to the building phase. Credit inquiries don't show up on your report until the next day so plan for Day 1 - the day that everything turns around. The goal is to apply for a mortgage two years later. On this day you will apply for a couple credit cards, if you NEED a car loan you will also do it this day. This way you maximize what credit you have without hurting the chances of the other loans (since the inquiries won't show up right away). Also, if you are unmarried and planning on marriage either hurry up and go through the legalities at the courthouse and make sure your spouse mirrors everything you are doing, or else hold off until you have the house. Once you are married your credit also becomes married, for better or for worse.

 

The easiest way to build credit fast is by using credit cards and paying them off every month. This way you consistently get a paid notice from the card issuer to the Big 3. Having a card and not using it means no notice gets passed on which doesn't help you. If you are going to be using a card to buy things why not get paid back for doing it? Instead of one card I suggest two or three - one that builds bank reward points such as the Chase Freedom card, one that builds hotel points, and one that offers cash back. This way you are getting 3 paid notices every month instead of one. I would suggest avoiding anything that charges a yearly fee, which many of these cards do so read the fine print. These offers are changing constantly, so be sure to see what the big card companies are offering, such as Chase, Citi, Bank of America, Discover and American Express (Amex). Choose what works best for you, and avoid applying for cards from the same issuer at the same time. You don't want to apply for cards less than 90 days apart so if you got a 0% card earlier to help out with paying things down wait 91 days then apply for some more. You could also plan ahead and do two and two. Once you have them move your spending to the cards, maybe have one for gas, one for groceries and one for utilities, just be sure you can pay them off every month before you start. For example, I just was approved for a Citi Hilton card and an Amex Hilton card within seconds of each other. Just read the fine print - a lot of these offers require you to spend a certain amount of money within a couple months so be sure you can pull that off without getting hurt. I'm not saying these cards are the best for you, just showing examples of whats out there. Keep in mind that American Express isn't accepted everywhere. I am a huge fan of their services, but I have to carry around something with a Visa logo for those times I can't use my Amex, like when I go to my vet.

 

If you aren't instantly approved for your new card, you should immediately call the Reconsideration line.

 

As a last resort if nobody will approve you, Bank of America has a secured credit card to help you rebuild credit. You give them a couple hundred dollars up front as collateral.

 

Savings are the key

 

Now that I've gone over how to build credit, the last part of the equation to buying a house is savings. I am a firm believer that nobody should buy a house without a 20% down payment, and that the banks moving away from that to 0% down loans is a large part of the housing market collapse. Putting this down protects you in the event that you need to bail on the house either because you need to relocate or can no longer afford it for some other reason. Short sales are done when an owner wants to sell and owes more than they can sell for, and banks do not like dealing with them. It also makes you less likely to fall into foreclosure because of lower payments. I understand that pulling off 20% on a two year credit rebuilding plan probably won't happen, but put away every cent you can AFTER paying off debt. Interest rates on debt are higher than interest rates on savings, so paying off debt before building savings makes more financial sense. It really is worth it to hold off on buying if it means putting away enough for a good size down payment.

 

Open a savings account that automatically withdraws from your checking every month. If you are a government/military employee I recommend checking out the Pentagon Financial credit union. I also suggest opening a money market account, so either speak with a financial consultant or open an account with a broker like Scottrade or Sharebuilder. This keeps your money liquid in case you need it for an emergency unlike a CD and it gives you a better interest rate than a traditional savings account, just keep in mind that you will have to pay fees to purchase shares so act accordingly.

 

Hopefully this can help people secure their financial future. Its a shame that high schools don't teach about responsible credit. Just because interest rates are low right now, it doesn't mean that is the right time to buy for you. Make sure you have a strong financial foundation before jumping into the biggest liability of your life.

Edited May 12, 2015 by copperhead

[copperhead]

space reserved

[copperhead]

Helpful links:

 

http://creditcardforum.com/

Edited June 2, 2012 by copperhead

[351mach11647545510]

Are the points you earn really worth the annual fee?

[copperhead]

It depends on how much you use the card. If you use it for most of your purchases then it probably is, you just need to estimate how much you would use it and see how much you would earn. I personally wouldn't get a card with an annual fee over $100.

[twistedfocus1647545489]

Maybe I missed it in the first post or you'd rather not say, but how bad is your credit? I think you're on the right track by immediately reducing your debt/income ratio. I know they have cut back the predatory lenders giving EVERYONE a loan but it seems like unless your credit is in the toilet you can get a good rate still if the rest of the equation is in order, mainly the debt to income ratio.

 

This is likely the hardest thing for irresponsible people that are only focused on toys rather than the big picture and I hope it shows to lenders.

 

Actually "building" a better credit score will take alot of time, but reorganizing and prioritizing is relatively quick.

[wnaplay1647545503]

I have been running some credit score simulators(unsure how accurate they are) one stated that if I were to pay my credit card off my score would go from 740 to nearly 840. That sounds like a drastic change for paying something off I havent only because I felt the balance was helping me rather than hurting. If I payed it off today does anyone know how quickly the changes would take affect?

[copperhead]

Jason, credit scores are generally evaluated daily. Once your payment clears then your score should reflect that. How long it will take to clear depends on your bank and the credit card company.

[Radio Flyer1647545514]

Should you request balance increases on the cards you don't use?

 

I still have the first two cards I got but the limits on them are only 1,000 and 1,500 and they never get put to use. One has a terrible points program and the other has a non existent points program. Should I request increases on them, or at least the first one with the lowest limit?

[copperhead]

I would go with - it depends.

 

Asking for a credit limit increase can help or hurt you, depending on the answer they give you. If it is increased, then it will help you out. If they deny you, then it will ding your score but not by much. They would probably base their decision off of everything on your credit report, not just the score alone. If your debt utilization (debt owed to credit limit ratio) is over 50% I wouldn't do it. This means if you owe more than 50% of your credit card limits combined, regardless of which cards have the debt. If you have any cards totally maxed, I wouldn't do it. If your score is below the average score in my chart above (620), I wouldn't do it. What it boils down to is if it looks like you are having trouble paying what you owe, then they probably won't increase your limit. Banks only like extending credit to people they know will pay them back.

 

Now, if you are stuck with decent credit and your debt load is looking good and you are just trying to find easy ways to bump your score up a bit, then by all means go for it. I would ask for an increase on the older one first though. No matter what, keep the oldest card. The second oldest honestly doesn't much matter, unless you aren't sure you will be able to hang onto the oldest. If you close it, you will get a small ding but then if you have other cards with higher limits then the improved debt utilization ratio from cancelling the low limit card will make up for it. If you want to keep the second oldest card, then if the first one is a success I'd wait a couple months then request an increase on the second oldest. If they won't increase it to at least $4,000 or $5,000 I'd cancel it, anything less wouldn't be enough to really boost your score.

[evan9381]

I wouldnt, unless you really need it. I have one CC I use often enough, IIRC, i think i asked once to make a purchase, they turned me down. Now every time i use it for a larger purchase, they bump it up. Recently, it was an 8500 limit, i put the down payment for my car on it (5k, had the cash, got the points paid it off few days later, free $50)...got a letter they bumped it up to 10k. I think 2 years ago it might have been at 3k and those are all increases i have not asked for. Id say start using it for larger amounts and paying it to show you have a reason for a higher limit and that you can handle the balances youre charging.

 

My other cards i dont use or rarely, and they never change. Only one i use often, my speedway card, approved for 2k in 06/07ish, and i think its still there. But i only use it for gas, pay it monthly, and its probably never been over $200 in a month, so no reason to bump it up.

 

FWIW, im barely 27, and score as of last month is somewhere at like 770-780ish. Id have to find the stuff my bank sent when i applied for my car loan.

[Radio Flyer1647545514]

I have zero debt other than a measly 700 dollar school loan left and an EXP score of 770. My cards get payed in full every month. I think I've payed 1 dollar in interest in 4 years on my CC's. I highly doubt I'll not be getting an increase if I applied for it.

 

My new Citi card is approved for 8400, my other two are at 1k and 1.5k so there is a big difference between my credit cards.

[Furloaf]

The issue with requesting an increase is that it initiates a hard inquiry. That inquiry will stay on your report/score for 1 year and it dings the score down some. If you have plans to apply for credit you actually need within a year it would be better to not ask for a credit line increase on any of your cards.

[copperhead]

It might be worth it if you are trying to get one last credit bump to buy a house, otherwise I wouldn't worry about it. You could use chargesmart.com to pay the student loan off with the card to show a high balance so long as you can pay it off right away, that could show need for a higher limit. Usually you can apply online to raise your limit. A hard pull only dings you for 2 to 5 points, its not a big deal unless you have a lot of pulls close together

[iwishiwascool]

Good info, everyone should be cognizant of this.

 

In my early 20's I was dumb and failed to pay on my student loans for a while, that along with some medical bills sunk my score to the mid-low 500s.

 

I used "WhyChat Credit Confusion" site to eliminate the medical collections. I consolidated and squared my student loan payments. For the most part, I became a credit abiding member of society.

 

Within 4 years I was in the mid-600s and bought a house and a car. Now, I am in the mid-high 700s and can get approved for most anything.

 

My most recent gains have been from increasing my revolving credit lines (over 200k) with at or near 0% utilization. I've gained about 30 points despite the hard pulls. \

 

 

With minimal work and attention most anyone living within their means should be able to do this, the benefits go far beyond the minimal amount of work to get there.

[iwishiwascool]

Lifehacker did an article today.

 

http://lifehacker.com/5976175/how-to-build-your-credit-from-nothing-in-six-simple-steps

[BigOxley]

+840, come at me bro.

 

Pay installments on time, pay stuff off early, win.

 

Freeze credit when you don't plan on buying anything else big.

[iwishiwascool]

+840, come at me bro.

 

Pay installments on time, pay stuff off early, win.

 

Freeze credit when you don't plan on buying anything else big.

 

Snap, I can't compete. My wife is close but I'm only in the upper-mid 700s (depending on the report).

[copperhead]

Lifehacker did an article today.

 

http://lifehacker.com/5976175/how-to-build-your-credit-from-nothing-in-six-simple-steps

 

Wow, that's about spot on to what I said here

[gridelock]

Great info

[Tha Kernal]

To add what Copperhead has posted: (written from personal experience)

 

If you do have to go the route of a bankruptcy for what ever reason do not under any circumstance think that your lawyer will follow up on your credit for you.

 

My wife and I have been through a Chapter 13 and although my lawyer did take care of getting our debts consolidated and into the case they did not tell me of anything to do with credit other than it will stay on your report for 7 years.

 

What I found out afterwords is that the companies that we were making payments to through the plan sometimes did not report things correctly if at all. When we got out of the bankruptcy there were accounts that still showed a balance on them, accounts that showed us late for 3 years, even though we were making payments to the trustee of the case, etc.

 

If you have to file, when you get your acceptance into the plan and you have your papers send them off to all your creditors that were named in the bankruptcy. As Copperhead mentioned there are the big 3 credit reporting agencies that in a lot of ways run your life (if you want to purchase anything on credit that is). These agencies used to only deal with consumers by snail mail. You can now create disputes through their websites and these still fall under the FCRA that states the creditor has 30 days to respond to your dispute or it will be removed from your report.

 

My wife and I were able to bring our credit scores up to 680 (mine) and 715 (hers) within 6 months of being out of our bankruptcy. Although we still have this on our report by making sure all the creditors have updated our accounts correctly it only reports as 1 derogatory instance instead of many. Again, as Copperhead mentioned Debt/Income is a huge part of helping us get loans after this as most banks will not touch debtors for at least 2 years after bankruptcy.

 

If you are a veteran you can use your VA loan for a home but you have to have a minimum of a 660 (as of Sept 12) credit score.

 

The first thing I recommend doing once you are done with it (or close to the end) is apply for a card that helps rebuild your credit. Many of these take a deposit (i.e. $500) then give you a $500 line of credit minus their yearly fee. The nice part is that they report to the big 3. This is important as not all banks / etc report to all agencies. Why this is I don't really know but you will find this as you look at your reports.

 

If you have any more questions for me please don't hesitate to ask. I was very depressed when this happend, and felt that I wasn't a man and really let my family down. I have since realized that I did everything in my power but when the economy took a dive and I was put out of work there was nothing I could do. I have since tried to help others know what to look for from my personal experience.

 

****I am not a credit professional nor do I claim that everything I say will work or fix your problem. I can only tell you my experiences/choices and what the results were.****

[iwishiwascool]

On that note, my biggest past mistake that lowered my score before I got crazy about it was 2 unpaid medical bills from when I was 19 or 20.

 

This letter helped me clear it the second I paid it. (It's a violation of HIPAA law to report a paid bill on your credit). http://whychat.5u.com/hipltr.html

 

That site has other advice for clearing different types of negative entries.

[copperhead]

Great input. Thanks for being able to talk about your personal experience Brandon. It is hard to take that step but for many, its the only possible option and once you are through it is possible to turn things around for the better. Keep at it.

 

Also, I added a graphic to the original post.

[Captain_Panic1647545539]

Ok, flame suit is on just in case.

 

I am starting small time but want to get up to a 50k + limit. In order to do this I would have to spend quite a bit, right? Well, not so much actually, if I am right about this. I know it is bad to hit the limit in your card so I would go about $200 under the limit every month and pay it off in about a week. So lets say for right now my limit is $2000. If I spent and payed off 1800/mo wouldn't that help tremendously?

 

So you're thinking, "Ok you retard, how are you going to repay that much every month?" Well, my reply would be to set up a square account. It isn't a business. It isn't considered a profit or anything. I could then either set up a dummy account with a bank I don't currently use, and then write myself checks toward the payment, once it clears, pay off the card, or just have square linked directly to my account and then just transfer the payment. Spending 1800 per month would cost me $54 a month @ a 3% per transaction, but wouldn't it be a credit boost?

 

Or possibly a variant to have a balance carry over so it will show making payments, but not paying off 100%?

 

So.... am I a genius, or a retard?

 

Discuss.

[Radio Flyer1647545514]

Are you trying to get a 50k limit on one card or spread out between cards with different banks?

 

I had a 17k combined limit by 21 and I have payed a total of $0.00 in interest on my credit cards since I was 18. You don't need to carry a balance to get limit increases. Part of your limit is based off of your annual salary and your credit history.

 

Citi has increased limits on all three of my cards without me even requesting increases and I maybe spend 2k at the absolute max per month on my cards between me and my girl. I now have 17k worth of credit just with my Citi cards. My assumption is they will increase your limit to get you to spend more, increasing the chance that you will not be able to pay in full.

 

I'm also pretty sure they check your credit in the middle of the month so you would want to do the majority of your spending toward the end of the month to keep a good debt to credit ratio.

 

I'm sure someone will come in to chime in with more reputable info, this is just my experience and assumptions.

Edited September 1, 2013 by Radio Flyer