How to Build Excellent Credit
Do you want to build excellent credit? If you are shopping for a loan, whether it is for a mortgage, car or a credit card need to understand that simply paying your debts on time is not all that is required when trying to build excellent credit.
For some, the journey to build excellent credit might begin by applying for a secured credit card and there are many banks out there that offer a secured card. In fact, they are practically lining up in waiting to accept your application, including their required minimum deposit in order to approve your secured credit card application.
Beware because a secured card usually has very high interest rates!
It isn’t uncommon for interest rates to be as high as 25%, not including various added fees. So just be careful, but know that using a secured card is one way to establish or rebuild credit.
There are many factors that impacts your credit score and you should definitely be aware of them and more importantly, watch each of these like a Hawk if you truly want to build excellent credit! Let’s review the steps:
- Payment History: Making on time payments is one of the most important factors that contribute to your FICO Score. A Lender will take note of any late payments that is past 30+ days, including collections activity and negative public records, if any.
- Amount of Indebtedness: Suppose you have a credit card with a $1,000 credit limit and you make your payments on time every month, but your outstanding balance owed is $850. In this example, your credit score will be negatively impacted. Why? Lenders will view this type of credit usage behavior as potentially careless and that you actually might not have enough income to make it through the month without using your credit card as a crutch, to hold you over until your next pay day. A good rule of thumb is that the percentage of your total credit usage should be no more than 30% to 40% (and that’s stretching it!) of your credit limit. If you have owe an outstanding balance of $850 and experience an interruption in employment, it would be more difficult to pay down $850 than it would be to pay $300. Lenders are more likely to view someone who maintains a high credit usage percentage as a potential default risk and if there is one word Lender’s hate, it would be the dreaded “D” word.
- Amount of New Credit: How much new credit do you have and how long have you had it? When it comes to learning how to build excellent credit keep in mind that TIME is the great revelator. Lenders understand that over time, your credit report will reveal a lot about your behavior as a personal financial steward of your finances. If you are new to having a credit card, or a mortgage then this could cause Lenders to be somewhat cautious because they don’t know enough about your character.
Therefore, Lenders prefer to deal with a borrow with an established credit history of at least 2 to 3 years, or longer.
I have been asked numerous times whether a credit card with a high interest rate should be closed. Rather than closing a credit card with a high interest rate, it’s best to just pay that card down and to keep it open because the longstanding [hopefully good] credit history will improve your credit score over time.
Keep that in mind. Timing is important…creditors love it when they see that a borrower has maintained an open credit account for several years and made on time payments.
Increase Your Credit Limit
The more you borrow -and pay on time- then this will give creditors an incentive to increase your credit balance. Therefore, if you have a credit card with a $1,000 limit, your credit balance could be increased to $1,500, which is good for your FICO Score.
This is the creditors way of saying, “you are a good credit risk, we’re happy to have your business and look forward to doing even more business with you!” No, let’s be clear about a little gimmick that some of these secured credit card companies will do.
If your payment history is good, then some secured credit card companies will inform you that “you have been pre-approved for an increase in your credit limit…BUT FOR A SMALL ONE TIME FEE!
They’re simply trying to earn an extra buck! A more reputable credit card company will simply increase your credit limit without charging you.
Four Very Important Additional Steps That You Must Take To Build Excellent Credit
You might sign on to view your credit balance online and discover that your credit limit has been increased from $3,000 to $5,000. Or, if you call the credit card company, they might increase your credit limit simply because you asked them to. Yes, you would still need an excellent repayment record, but in many cases all you have to do is ask.
- How well can you mix it up? Your credit mix is very important. What is the composition of your various credit obligations? Do you just have a car note, a mortgage and a couple of credit cards? How about a personal loan with an open line of credit? The more diverse your credit mix the better; again, especially if you make on time payments and do not max out your credit balance. Your credit mix is important because it is a good representation of your ability to properly manage multiple financial obligations.
- I’m watching YOU, watch ME: Last but not least, a Lender is going to observe the frequency of “inquires” into a borrower’s credit report over the most recent 24 months. For example, if you are applying for numerous credit cards, this will result in “hard” inquiries (vs. a “soft inquiry”) into your credit report and that will negatively impact your credit score. An example of a “soft” inquiry is when a person check’s their own credit report online. This will not have a negative impact on your credit score. Beware of the manner in which your credit is pulled when applying for personal loan, such as a car. Car dealerships have one goal in mind and that is to sell you a car! Some dealerships could car less about the impact on your credit score when you are on their car lot shopping for a new or used automobile. Some car dealers are more sympathetic and will run your credit once and share the results with a number of different lending institutions. Be sure to ask the sale representative if they are going to pull your credit more than once. It probably shouldn’t be pulled more than three (3) times just to be safe.
- Watch It Like A Hawk: One of the worse things that you can do is to ignore your own credit report. Good credit is monitored and maintained because the good credit Steward (YOU!) is actively engaged in learning as much as possible about what is being reported each month on their credit report. If you see something that you do not agree with, then it is your responsibility to take the appropriate actions to inquire about it and have it removed if something appears on your credit report which shouldn’t be there.
- Know Your Rights: Everyone should be familiar with the Fair Credit Reporting Act (FCRA). The FCRA purpose is to ensure the accuracy, fairness and privacy of information contained in your credit profile, by consumer reporting agencies. The U.S. Federal Trade Commission (my former employer when I was an undergraduate student at Howard University, I am very proud to say) enforces the FCRA, as outlined in 15 U.S.C. 1681.
You must be informed if/when information in your credit report is used against you. Anyone who makes use of information in another person’s credit report, whether it is to deny an application for credit, employment or insurance is legally obligated to inform you and they have to provide you with the name, address and phone number of credit bureau (e.g. TransUnion, Equifax, Experian) where they were able to ascertain information about you.
After providing the appropriate identification such as your social security number and possibly even your Driver’s License, you have the right to request all of the pertinent information in your personal consumer file held at the credit bureaus (i.e. “file disclosure”). You are entitled to one free disclosure per year if any of the following has occurred:
- Advertise action has been taken against you based on what has been disclosed in your credit profile.
- Someone has committed the crime of identity theft against you, or a fraud alert has been placed in your file.
- Fraudulent activity has resulted in inaccurate information being placed in your file.
- You are a recipient of government (public) assistance
- You are unemployed but expect to apply for employment within 60 days
Did you know that you have the right to ask for a credit score?
Credit scores are the most widely used indication of your credit-worthiness and is based on information gathered about you and disseminated to the credit bureaus. You have the right to request your credit score from the credit reporting agencies that create and share scores that is used when applying for a mortgage, however you might have to pay a fee to receive your score. In the event that inacurate information has been reported about to the credit bureaus about you, then that agency must research your dispute and determine whether the information has been erroneously reported.
Any inaccurate information that has been reported about you must be verifiable, corrected and/or removed within a thirty (30) day period from the date of your dispute, or question about its validity. If the information has been deemed accurate by the credit bureau, then the credit agency reserves the right to not remove or amend the information that is being disputed.
There is a 7-year rule for reporting negative information, including a bankruptcy that is more than 10 years old. Also, Someone requesting a copy of your credit report must have a credible and valid need to review your credit file.
An example of a valid need may include an application that you have submitted for credit, employment, etc.
The Fair Credit Reporting Act provides guidelines for what type of needs are considered to be valid.
An employer may not access your credit report without your consent
Employers must have your consent in writing before submitting a request to review your credit report. The trucking industry is not required to have written consent, generally. Can “pre-screened” offers of insurance or credit be limited?
A toll-free number must be included for unsolicited “pre-screened” offers for insurance and credit, giving you the right to call and have your name and home address removed from such solicitations. You can also OPT-OUT with the nationwide credit reporting agencies by calling 1 (888) 567-8688 (1-888-5 OPTOUT).
If your rights under the Fair Credit Reporting Act (FCRA) have been violated, you have the right to seek legal damages with the assistance of an attorney.
Service men and women of the United States Armed Forces and victims of identity theft have additional rights which can be reviewed here: www.ftc.gov/credit.
Managing credit is not to be taken lightly. It could mean the difference between home ownership or not…the difference between employment or unemployment. Your credit behavior can also determine whether you are able to take advantage of wealth building opportunities. It is important to work with a professional who will hold you accountable to monitoring, and if necessary improving your credit. Now is the time to build excellent credit!
Let’s do this! Grab the bull (your credit) by the horns! Begin implementing everything that I shared in this blog post! Watch your credit like a Hawk!
Contact my office at your convenience and let’s begin helping you build excellent credit, tackle your impending retirement planning needs, review your estate plan and conduct an investment analysis on your portfolio to ensure that it is properly allocated based on your risk tolerance and where the economy might be headed in the future.