Like it or not, banks depend traditionally on credit scores to determine if they’ll lend you money – even though, as author and mortgage broker Philip Tirone points out, about 80% of people have credit report errors. In this second of a two-part series, Tirone continues with his “Seven Steps to a 720 Credit Score.” His strategy will teach you how to improve your credit score based on patterns of change that he identified when he studied thousands of credit reports, interviewed credit card collection lawyers, studied the repossession, foreclosure, and bankruptcy facts, and devised a system to determine how credit cards can impact a credit score.
Step Four: Learn the difference between helpful and harmful installment loans
Having a healthy mix of credit – including installment loans – is a great way to increase your credit score. The best credit scores have three to five revolving credit cards, an installment loan and a mortgage. Obviously, getting a mortgage is a big commitment, so you should only do this if you actually want to buy a house. But adding an installment loan to your credit report is relatively easy. Just make sure you’re applying for an installment loan, and not some other type of credit. A lot of stores offer credit cards that help you finance the account – these are not the same as installment loans. And other stores offer finance accounts, which are harmful installment loans. These accounts allow you to delay payment, or offer no interest until a later date. If you buy a piece of furniture using a loan that allows you to delay payments for six months, or pay no interest until the following year, you’re likely applying for a harmful installment loan. To make sure you’re applying for a helpful installment loan, simply ask to speak to the credit representative. Get on the phone with the person representing the bank that’s offering the loan.
Another option for adding an installment loan to your credit report is available for car owners. Walk into your local bank or credit union and ask for a small installment loan on your existing car. The loan doesn’t have to be large – try applying for a $1,000 installment loan that you will pay off over six or twelve payments. Keep in mind that you will pay interest, but if you pay the loan off quickly and keep it small, the interest will be nominal. If you have bad credit, this will quickly help you increase your credit score, which will pay dividends on future mortgages, installment loans and credit cards.
Step Five: Remove high-priority errors
Approximately 80% of people have credit report errors, a quarter of which are serious enough to cause a person to lose a job opportunity or loan. The worst errors, those caused by identity theft, can be a nightmare to remove from your credit report. Even simple, honest errors can be challenging and time consuming. People with accounts in collection often have duplicate collection notices reported for the same account. Whatever the high priority error, identify it and correct it. By removing credit report errors, you could see your score jump 20, 50, or even 100 points!
Don’t spend too much time on this step. Errors that are older than two years are likely not hurting your credit score that much. As well, don’t waste time correcting low-priority errors, such as a typo in the spelling of your street address. Here are some high-priority credit report errors:
Information such as names, social insurance numbers, or accounts that don’t belong to you could indicate that you’re a victim of identity theft.
Delinquent account information, such as a collection notices, that are listed more than once.
Credit limits incorrectly reported or not reported at all.
Incorrect delinquent information, especially if the information is less than two years old.
Step Six: Address credit collections head-on
Did you know that each time you make a payment on a credit collections account, your credit score could be damaged? It’s shocking but true. When you’re 30 days late on a bill, a creditor will report a late payment to the credit bureaus. This happens again at 60 days and again at 90 days. Once you are 120 days late, the bill will typically be turned over to a credit collections company. Each late payment causes your score to drop, and the collection causes it to drop even more. It would make sense that once you paid the credit collections, your score would increase. But this isn’t the way the credit-scoring system works.
A collection notice will stay on your credit report for seven years (yes, seven years) from the date of last activity. So each payment on a collection account renews the seven-year timeframe and causes your score to drop again
If you have credit collections, your goal is to negotiate with the creditor to stop this from happening. You have several options:
Pay the balance in full in exchange for a letter of deletion. A letter of deletion is not the same thing as a letter of payment. A letter of payment is useless, but a letter of deletion actually tells the credit bureaus to remove an item from your credit report.
Make payments in exchange for a letter of deletion upon final payment.
If you can’t successfully negotiate for a letter of deletion, but you want to pay the balance, simply ask that the company stop reporting to the credit bureaus. This prevents your score from dropping further.
Regardless of which option you choose, you should consider negotiating to pay a smaller balance. A lot of creditors will allow you to settle for cents on the dollar. One of my clients was able to settle for 20¢ on the dollar! Removing a collection account is one of the fastest ways to increase a credit score.
Step Seven: Create a monitoring plan
Once you’ve learned how to fix credit, be sure you maintain your high credit score through a credit-monitoring plan. Though you can hire a credit monitoring company, I suggest you schedule time to monitor your own credit score. First, create a budget and live frugally. Second, use technology to keep your bills current and your accounts active. Third, review your credit card bills and bank statements monthly. Fourth, pull your credit report at least once every six months.
Credit Monitoring Plan 1: Create a budget and live frugally
Live within your means. If you have not created a budget, now is the time to do so. If you’ve already completed your budget, make a note to review it in six months. Finances change, people’s obligations change, and so must your budget. Reviewing your budget allows you to modify your behaviour so you too can pay your bills on time.
Credit Monitoring Plan 2: Use Technology to keep your bills current and your accounts active
I once forgot to pay my car bill, and my score dropped 30 points overnight! My suggestion here is that you automate every one of your regular payments. You can do this by setting up automatic payments either through your bank, or with the creditor directly. When creating these automatic payments, be creative about how you can keep your credit cards active. Inactive accounts do nothing for your credit score, so use each of your credit cards to pay a bill monthly. You can even avoid paying interest on these by being strategic about the payment dates. For instance, pay your gym membership with your Visa on the first of every month; then pay your Visa bill on the third of every month. This way, you don’t pay interest on your gym membership.
Credit Monitoring Plan 3: Review your statements monthly
Review your credit cards and bank statements monthly. Specifically, look for signs you’re a victim of identity theft. Then check the limits on your credit cards. If the limit has been lowered, remember to lower the balance to no more than 30%.
Credit Monitoring Plan 4: Pull your credit report every six months
The final step of your credit-monitoring plan is to pull your credit report every six months. Keep in mind that your credit score will not suffer if you pull your own credit report. Be sure to pull your report from www.720ficoscore.com so that you get your FICO score and not your consumer score.
How to raise your credit score quickly – Part 2
