Banks traditionally depend on credit scores to determine if they’ll lend you money – even though, as author and mortgage broker Philip Tirone points out in this first of a two-part series, about 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). This month and next, Tirone will reveal “Seven Steps to a 720 Credit Score.” His strategy will teach you how to improve your credit score based on patterns that he identified when he studied thousands of credit reports, interviewed credit card collection lawyers, studied repossession, foreclosure and bankruptcy facts, and devised a system to determine how credit cards can impact a credit score.
STEP 1: Get rid of your debt!
Sometimes the best first step to take is either bankruptcy or debt negotiation. Many of my clients don’t make a logical decision about the debt they have. When this happens, they end making minimum payments on their credit cards and never get what they ultimately want – to be debt free or have a high credit score. As I say over and over, the key to raising your credit score if you have debt is to learn your options.
STEP 2: Have the right number of credit cards
Credit bureaus give higher scores to people with at least three revolving accounts. Preferably, you should have no more than five credit cards. Two is not enough; six is too many. Three to five is just right. Three things to keep in mind about opening credit cards:
1. Don’t open retail-store credit cards. Because you must limit the number of credit cards you carry to just three to five, don’t waste one of them on a card you can only use in one store. You might be tempted to open a retail store credit card so you can save 10% or 15% on the day’s purchases. Resist this temptation. The amount of money you will pay in interest will far exceed the one-time savings.
2. Consider opening a secured credit card that requires you to make a deposit equal to or more than your limit, thereby guaranteeing the bank that you will repay the loan. If you don’t make your monthly payment, the deposit will be applied to your balance, and your credit score will drop.
3. If you must open new credit cards, open them all at once. A big part of the credit-scoring formula is the age of your accounts. Each time you open a new account, the average age is lowered. So open all the cards at once. Though your score will initially drop, you’ll be better off in the long run. If you have more than five credit cards, don’t close the extra accounts. Most credit experts agree that once you have opened the excess accounts, the damage is done. In fact, closing these credit cards might even hurt your score - and will certainly never help it.
STEP 3: Make sure credit bureaus are reporting your proper credit limit
When I first started out, I was shocked to learn that credit card companies often report the wrong credit limit to the credit bureaus – intentionally! This hurts your credit score because it causes your utilization rate to appear unnaturally high. Remember that your credit cards should never carry a balance that exceeds 30% of their limit. If your credit card company is reporting your limit as lower than it actually is, your utilization rate will appear too high.
Imagine you have a $1,500 balance with a $5,000 limit – a 30% utilization rate. But the credit card company reports your credit limit as only $3,000. Now, your utilization rate appears to be 50%. Having too high of a utilization rate is one of the reasons people have bad credit.
So why do credit card companies fail to report correct credit limits? Basically, they don’t want to lose their client base. If other companies see that you have a high credit limit and a positive credit score, they might solicit your business. By failing to report the correct credit limit, credit card companies keep your name off mailing lists and can better retain your business.
Sometimes credit card companies don’t report any limit at all! When this happens, credit bureaus might report your limit as $0, meaning any balance you carry will make you appear to be over the limit, which is also bad for your credit score. If your credit limit is not listed on your credit report, or if it’s inaccurate, contact your credit card company and ask it to correct the mistake immediately.