It is interesting how the credit industry continues to suggest that credit scoring is based on a simple process and that all people need to do is to pay make their payments on time and all will be well. If the methodology is so simple, why don’t they come out and tell us how they calculate scores? No, not just a generic template of information, but a detailed breakdown of the credit scoring recipe?
The truth is that they don’t want us to know, and that is the foundation of the credit scoring system. Why? My guess is that they believe that consumers would be able to raise their scores, which would throw a wrench into their entire system.
Over the last several years, I was able to have direct computer access to the credit bureaus while working in the mortgage industry. Through a series of trial and error experiences with hundreds of clients, I have uncovered the secrets that anyone can use to raise their credit score.
Secret #1 – In Order To Have A Good Credit Score, You Must Have Enough Open Credit
I have encountered many individuals that have dropped out of the credit system, disavowed credit cards, and then needed a mortgage or an auto loan only to find out that they had no credit score. It is possible (and very easy), to end up with a 0 credit score. A zero score does not mean that you have bad credit, it means that you have insufficient credit data to have a score. It is also true that having very limited open credit can create a very low score. For example, a person with just an auto loan or only 1 -2 credit cards will never achieve a high score no matter what they do! They may be trapped with what would be described as an average score forever.
Here is the formula of open credit that the scoring models are looking for:
1 to 2 Installment Loans (auto loans are an example of an installment loan).
2 to 3 Revolving Accounts (credit cards are revolving accounts).
1 to 2 Mortgage Accounts
What can you do if you don’t have enough open credit? I would not take out a mortgage or an auto loan solely to increase your credit portfolio, but you can establish 2 to 3 revolving accounts and an installment loan very easily. What I have done for years is to direct my clients to establish up to three secured credit cards. These are cards that require a deposit equal to the amount of credit you are granted. So, it is really not credit but shows up on your credit as a revolving account just the same. You can also find a local bank or credit union that will allow you to take a small installment loan if you agree to place enough money on deposit to guarantee the loan. For example, we refer clients here in Daytona to a local credit union that will extend a $300 installment loan if the borrower deposits $300 in a savings account. No one is turned down, since the loan is backed up by the savings account.
If you don’t have an auto loan or a mortgage, don’t worry about it. By setting up three revolving accounts and one installment loan, you will have enough credit in your portfolio to build a very good score.
Secret #2 – You Must Carefully Manage Your Portfolio of Revolving Credit
Now that have set up a basic portfolio of credit, you must carefully manage your obligations. You must make your payments on time, and to be sure you do, make them early. 40% of your score will be based on the timeliness of your payments. On time payments are a critical part of building your score.
A lesser known, but large part of your score is what is known as debt utilization ratio. This complicated sounding term is actually a very simple concept. The amount of your credit card balances are compared to your available credit and a ratio is determined. For example, if you have $300 of available space on a credit card and have used $150 of your credit line, you will have a 50% debt utilization ratio. Up to 35% of your credit score is based on the balances on your credit cards compared to the available credit. Solution: Keep low balances. If your balances are greater than 1/3 of your available credit, you will be penalized in your score.
Secret #3 – Credit Scoring Is Heavily Weighted On The Most Recent 12 to 18 Months Of Your Credit Activity
I have had many clients come into my office and tell me that they paid all of their credit obligations on time for ten years or more and then had a financial crisis. In just 2 to 3 months they lost their good score. Credit scores are based almost entirely on your credit activity during the last 12 to 18 months. So, a lifetime of good credit habits does not follow you very long after a few late payments. While that may be very troubling to learn, it also includes some very good news for us as well. Since it does not take very long to see your score go down, it is also the case that you can move a low score much higher in a short period of time. I have had many clients gain 100 points in their score in 3 to 4 months using my credit scoring strategies.
There are some other very important concepts, such as how to deal with negative credit items on your report, bankruptcy, foreclosure, and old accounts. These issues are discussed in my new e Book.
I cover all of my credit scoring strategies in detail in my new e book Credit Scoring Secrets, available for $14.95 To Order Click Here
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