The Credit Solution. By Mike Roberts. Copyright 2012 by Mike Roberts

Transcription

1 The Credit Solution Bonus #2 Build Your Credit from Scratch Go from No Crediit (or Bad Crediit) to Good Crediit iin Fiive Steps By Mike Roberts The Credit Solution Copyright 2012 by Mike Roberts

2 Copyright Information: Copyright 2011, 2012 by Mike Roberts All rights reserved. No part of this book may be reproduced, distributed, transmitted, stored in a retrieval system or used in any form or by any means, whether electronic, mechanical or digital, except as may be expressly permitted by applicable copyright laws or as expressly allowed by the publisher or the author in writing. Publisher Information: Published by Smart Consumer Solutions, LLC, 601 Van Ness Ave, STE E869 San Francisco, CA Disclaimer: All of the information contained in this publication is true and accurate according to the best information available to me at the time of publication. Please understand, however, that laws and credit industry practices and procedures are constantly evolving; so you should independently update laws, practices and facts before you take action. I do not accept any responsibility for errors or mistakes of any kind, or for any damages or losses that might result from the use of any information provided. Also, I am not a lender, a collection agent or a credit reporting agency. I am not an accountant or an attorney, and nothing in these materials is intended as professional advice. It is personal opinion only. I am providing it to you without any warranties or guarantees whatsoever. To obtain advice as to the tax or legal consequences of any action covered in these materials, or any action that you might consider based on these materials, you should consult an attorney, an accountant, or both. What I have tried to do here is simply offer solid, useful information that I have obtained through my own personal and business experience. Any action you choose to take based on any information that I provide, including forms and other attachments, is entirely your responsibility. 1

3 Table of Contents Introduction:... 3 Who Needs Good Credit?... 3 Why Do You Need Good Credit?... 3 What Exactly Is Good Credit?... 3 Will You Benefit from This Report?... 4 Step 1: Figure out Your Current Finances Step 2: Open a Bank Account Step 3: Get a Secured Credit Card Step 4: Become an Authorized User Step 5: Get an Unsecured Credit Card Step 6: Get an Installment Loan Some General Principles Some Credit Repair Methods to Avoid The End Game

4 Introduction: Who Needs Good Credit? You Do! In fact, everyone does. I feel very strongly about this because I personally know what it s like to have credit that isn t so good. I ve been there. I ve felt the pain, believe me; and I want to help you avoid it (if you have no credit now) or stop it (if you have bad credit now). That s exactly why I ve written this report. If your credit picture is bleak, that s about to change. The help you need is in your hands right now. Why Do You Need Good Credit? Because We Live in a Credit Society. The world we all live in today favors those with good credit and punishes those who don t have it. Bad credit can cost you a fortune. For an in-depth look at how severe the penalties for poor credit can be, take a look at The Credit Solution, Chapter 1. The details and examples presented there are not for the faint hearted, but they will help you understand exactly why establishing good credit is worth the effort. They ll help you stay motivated and focused as you go through the process of changing your financial life. I want you to avoid paying the multi-hundred thousand dollar penalties that I know you ll have to pay over your lifetime if you don t establish good credit now. What Exactly Is Good Credit? It s a FICO Score of at Least 720. Whenever I talk about good credit, I m referring to a FICO credit score of 720 or better. As you know from The Credit Solution, there are three major credit reporting agencies (CRAs): Experian, Equifax and TransUnion. Their sole purpose in life is to compile detailed information about your financial life and report it upon request, in the form of credit reports and FICO scores, to creditors around the world. In The Credit Solution, I explain exactly how the CRAs do what they do, how the credit reporting system really works, and how they calculate your FICO score; but for purposes of this report you just need to understand that you need a score of 720 or higher. 3

5 Will You Benefit from This Report? The information that I cover in this report will help you (in fact, it will be invaluable to you) if You have not yet established credit in your own name. o Maybe you re a young person, just starting out in your adult life, and you ve never financed a purchase or held a credit card in your own name. o Perhaps you ve recently ended a marriage in which your spouse handled all the finances. You ve suffered through a financial meltdown that thoroughly trashed your credit. o Maybe there s a bankruptcy in your recent past or you ve recently lost your home through foreclosure; o You might be one of the millions of people who ve been hit with an avalanche of medical expenses and you ve had several accounts go to collections; o Perhaps you re now unemployed, and as a result you ve defaulted on one or more loans; or o Maybe you just haven t been financially responsible in the past, but you ve turned a corner in your life and you want to start fresh. It really doesn t matter why you have no credit, or why your credit is bad. Regardless of the reason, the information you ll find here will help you improve your financial life (and your life in general). Bankruptcy or Foreclosure? If you ve recently suffered through a bankruptcy or a foreclosure, you might be thinking that there isn t any hope for you that there s no way you ll be able to rebuild your credit any time soon. Think again. It s true that these negative marks can torpedo your credit score (sometimes by 200 points or more), It s true that they generally stay on your credit report at least seven years (ten years for bankruptcies), 4

6 But it s not true that your credit score has to remain low throughout the seven or ten years. The fact is that the harmful effect of a bankruptcy or foreclosure fades with time. The CRAs weigh recent events more heavily than older events in calculating your FICO score. This means that there are things you can do right now to help yourself. You can start now to build a history of recent events that will begin to outweigh your bankruptcy or foreclosure as time goes by. You can build up your decimated credit, and achieve a respectable score in as little as 18 months to two years after a bankruptcy or a foreclosure if you work hard during this period to establish other loan accounts and make all your payments on time. In this report, I m going to show you exactly how to do just that. Here s how this will work: I m going to take you through this in six steps. Steps 1, 2, 3 and 4 are available to you right now no matter who you are or how dismal your credit situation might be. You can get started today with Steps 1 through 4 even if you lost your home through foreclosure last week and recently filed bankruptcy. Steps 5 and 6 are for those of you who have completed the first four steps or who already have established some minimum level of credit. If you ve done nothing to date to establish credit, or if you ve recently suffered through a financial catastrophe that destroyed your credit, you ll have to wait a little while to start moving through the last two steps. When I say a little while, I mean it. You won t have to wait long. If you follow the first four steps, you can be working your way through Steps 5 and 6 in as little as three to six months. I know that this process will work for you because I m going to show you what your options are, and I m going to help you decide which ones to pick. If you make the wrong choices as you go along, you can end up wasting your time and making your credit picture worse instead of better. You want to avoid that, and you will. When you ve finished this report, you ll be ready to start building your credit and you ll know exactly how to do it. One more thing: I ve learned the hard way what it takes to establish and rebuild damaged credit. I ve gone through it myself, and I ve had the pleasure and satisfaction of helping thousands of others improve their credit. I ve studied the lending and credit reporting system in depth, and I ve learned how the various parts to the puzzle fit together. I ve put a lot of thought into the credit-building steps that you ll find in this report, and I promise you that they are all critical. Please don t leave any of them out. To get the maximum benefit from this program, you need to do each and every step. 5

7 Step 1: Figure out Your Current Finances. The first thing you have to do is determine exactly where you stand financially right now. You need to know how much money you have coming in every month, and how much you re spending. Now maybe you re a person who budgets very carefully, and you ve already calculated your monthly income and expenses down to the penny. But... you re probably not. I certainly wasn t when I started working on improving my credit, and I can tell you from experience that starting with a candid cash flow assessment is a huge help. Get Your Worksheets. To help you through this I ve put together two worksheets for you one for your monthly income and another for your monthly expenses. You ll find them in the Where Do Things Stand Right Now? section of the Bonus Workbook that comes with The Credit Solution. Please go there now and fill out the two worksheets. You ll find plenty of examples, instructions and useful tips to help you through the process. Get Your Credit Reports. Don t make the mistake of relying on your check register and the bills that show up in your mailbox to get a complete list of your expenses. You might have obligations that don t immediately come to mind, and you need to factor those in. Get your credit report from all three of the major CRAs and go over it carefully to make sure you re accounting for everything. It s amazing how often a credit report will reveal items that are long forgotten. I go over the details of how to get your report, and how to read and understand it, in The Credit Solution. Once you ve accounted for everything and you ve finished putting in all the numbers, you ll see the current financial truth revealed. You ll see either good news or bad news. You re currently running in the black or the red (you re either making ends meet, or you re not). If You re in the Red, you re falling farther and farther behind with each passing month. This isn t good. The longer it continues, the less likely it is that you ll ever establish good credit. If this describes you, you still can use much of the material in this report to help yourself right now; but to take full advantage of my approach, you ll soon have to find a way to get your expenses down. You really have only two options: o You can find places in your budget where you can economize (this might work for you if your expenses exceed your income by only a small amount), or 6

8 o You can learn how to negotiate with your creditors and convince them to reduce the amounts you owe. This way you can take some big bites out of the numbers in your expenses column. You might be surprised to learn that this is even possible, but I promise you it is. I ve done it myself; and I ve put together a complete method that you can use to reduce your own debts by negotiating with your creditors. It includes detailed instructions, form letters to creditors, and negotiation techniques; and you can find out more about it on the Credit Solution website. I strongly recommend that you do both, especially if you have a lot of debt; but helping you with the process of getting your finances in shape is beyond the scope of this report. The good news is that even if you re in the red right now, you can still make good use of the information that follows. You ll just be using the tools and techniques a little differently. I ll explain more as we get into the details. If You re in the Black, congratulations. There s no reason why you can t look forward to establishing good credit, and keeping it that way. You re all set to take full advantage of the credit-building techniques I m about to share with you. Step 2: Open a Bank Account. If you already have a bank or credit union account, that s great. If you don t, open one. In fact, I recommend that you have both a savings and a checking account. There are two reasons for this: 1. You re going to be applying for credit, and credit applications often request checking and savings account numbers. If you can supply those numbers, this tells the potential creditor that you have some of the basic personal finance tools (a checking account and a savings account) in place. If you can t identify any bank accounts, it sends the opposite message. 2. You need a relationship with a bank or a credit union, for reasons that will become clear as we move along. Let s be clear: I m not suggesting that you need a bank account because it will directly help your FICO score. In fact, it won t. By itself, opening a bank account won t help your score at all because banks and credit unions don t report checking or savings activity to the CRAs. The reason I recommend having a 7

9 bank account is that it will put you in a better position to do some of the things that will help your score things that I ll cover in Steps 5 and 6. Step 3: Get a Secured Credit Card. OK, now it s time to start taking actions that directly will affect your credit score. As you know from reading The Credit Solution, everybody builds good credit the same way by using credit. It s the process of borrowing money, and repaying it on time, that establishes and reinforces a credit history. So you need to borrow some money, and the sooner you do it the better. The easiest, quickest way to borrow is with a credit card. You need one, and you need it now. But... if your credit is really in the tank right now, you might be having this thought: No way. There s no chance I can qualify for a credit card. I m sunk. Well, believe me; you re not out of luck. There is something called a secured credit card that you can get right now today. Before we get into the details of this, let s cover some credit card basics: What is a Credit Card? A credit card is any type of loan account that has these features: It is open ended. This means that you don t borrow a fixed amount when you open the account, and there is no fixed date on which the account will close. How much you owe from month to month depends on how much you use the card, and whether you reduce your balance to zero each month. Because credit cards just continue indefinitely, they are often referred to as revolving accounts. Like other kinds of loans, credit cards come in two flavors secured and unsecured. If a card is unsecured, there is no collateral for the loan. There is nothing for the credit card company to seize if you don t pay. It s more difficult to get an unsecured credit card, but the interest rates and fees are usually better on these cards. Most credit cards are unsecured. If a card is secured, this means that the credit card company can take something of value from you (the collateral) to satisfy the debt if you default. These cards are much easier to get because the credit card company doesn t have to worry. If you don t pay, it will just seize the collateral. 8

10 You might not qualify for an unsecured card right now, but you can get a secured card today. Here s how these work. You deposit some cash with the credit card company and they hold on to it as collateral. The amount of your deposit becomes the credit limit on your card. Once you have the card, you can use it just like any other credit card; but if you default on the account, the credit card company keeps your deposit. You make your monthly payments out of your cash flow, not from the amount you deposit with the credit card company. You ll pay a higher interest rate and higher annual fees than you would for an unsecured card. Some banks and credit unions offer these cards, and if yours does that s your best bet. If not, you ll be able to find one online. Most major banks and credit card companies have these available, so you can shop the features. Look for a card that Has no application fee, Requires a relatively low annual fee (under $50 instead of $100 or more), Does not require that you buy an insurance policy to cover the risk of default (If you hear the words insurance policy move on; this is a sure sign that you re dealing with an unscrupulous company. They don t need insurance. They ll have your deposit as a guarantee of payment.), Offers an opportunity to switch the account to unsecured status after a period of good payment performance (usually at least a year, but possibly less), Pays interest on your deposit amount (it won t be much, but something is better than nothing), and Has a wide range of deposits and corresponding spending limits available. Some companies will let you start as low as $200, and as you get into the swing of things they ll let you deposit more and increase your limit to as high as $3,000. Again, these secured cards are made to order for people with troubled credit and they are the easiest kind of card to get. They are extremely useful from a 9

11 credit-building point of view because they provide an opportunity to start right away building up a positive payment history. Two really important tips: Talk to your banker, or call and talk to the credit card customer service folks, and make sure you ll qualify before you fill out the application. There are a few companies (only a few, fortunately) whose policy is to deny even secured cards to people with recent bankruptcies. You want to make sure you re not applying to one of these because every time you apply for any kind of credit, it counts as an inquiry on your credit report. As you know from The Credit Solution, inquiries can mount up and hurt your score. Make sure that the card you re applying for reports to all three credit bureaus (CRAs). You can ask you banker or get this information on the phone from the customer service representative. Don t take no or maybe for an answer on this. Be certain that your card company reports to all three CRAs. Step 4: Become an Authorized User. While you re waiting for your new secured credit card to arrive, I want you to identify a couple of people in your life who meet two criteria: 1. They are very financially responsible. You know for certain that they have excellent credit. 2. They know you well, and their feelings about you are loving and generous. Only very close friends or family members are going to make this list, and that s OK because you only need one or two such people. Why do you need them? Because they can help you rebuild your credit by allowing you to become an authorized user on one of their credit cards. Becoming an authorized user on someone else s account provides a way to get access to a good card and reap all the credit-building benefits. It is open to you now, no matter what condition your current credit is in. An authorized user is a person who has a credit card with his name on it, and can use the card; but has no responsibility for paying on the account. The owner of the account has all the liability; the authorized user has none. 10

12 And here s the kicker: Even though as an authorized user you have no liability for money owed on the account, the owner s payment record is factored into your FICO score calculation. That s right; the owner s timely payments on the account build up your credit score. OK, you re thinking about now, sounds great. But who in his right mind is going to agree to this? My friends and relatives love me; but they re not crazy. Maybe not, but being crazy isn t a requirement. There is a way to handle this that will allow you to put this tool to work for you and at the same time avoid any risk for anyone. Here s how to approach it: Explain to your friend or relative that all they have to do to add you to one of their existing accounts is contact the credit card company and make the request (they ll just need your name, address and SSN). Explain that when the new card is issued with your name on it, it should be mailed to the owner of the account, not to you, and that when it arrives the owner should put it in a desk drawer or destroy it. Explain that you don t need to carry the card because you don t intend to use it. The only purpose of this exercise is to help you build credit, not to actually allow you to spend the account owner s money. Explain that you also don t want to know the account number and security code (that way you won t be able to make online purchases with the card). Explain that the owner can remove you from the account at any time, without notice to you and without your consent. Explain that your own poor credit history won t affect the owner s score going forward because you are not in control of the account in any way. The owner will still make the payments, and it s the owner s payment history alone that will affect his score. The fact that you re an authorized user on the account won t affect the owner s credit at all. These assurances should be enough to persuade a close friend or an immediate family member to help you out with this; but just convincing someone to go along with your plan isn t all there is to the exercise. Here are some important considerations: Make sure that the credit card company reports authorized users to the CRAs. This is critical. If they don t, this is all a waste of time and effort. The whole point of this is for you to get the benefit of the owner s payment record on the account, and that can t happen unless the CRAs 11

13 know that you re an authorized user. Make sure that the account is in good standing and that the owner has no late pays on record. The older the account is, and the longer the owner has been paying on time, the better. If the owner s payment record isn t good, becoming an authorized user will immediately hurt your score. It s best for you if the limit on the account is high and the owner makes a habit of keeping the balance below 30% of that limit. I cover the reasons for this in detail in The Credit Solution. Make sure you have absolute faith in the account owner s financial responsibility. Remember that you probably won t be getting statements or seeing any correspondence on the account. If the owner gets behind or defaults, you won t know until it s too late. Any credit score gains you might have made will already have disappeared. As a tool for building credit, authorized user status on someone else s established account is a beautiful thing. It has lots of advantages: The standard practice is to add authorized users to accounts without running a credit check on the person to be added. This means that your report won t be hit with a new inquiry when you re added to the owner s account. You don t have to be approved. It doesn t matter how dark your credit picture is. The positive effect on your score can be substantial and quick sometimes as much as a point bump for a single card within a few weeks. Once you re on the card, you don t have to do anything to keep improving your score. As the owner continues to pay as agreed, your score should continue to rise. If you handle it right, there is no risk to you and no risk to the account owner. Step 5: Get an Unsecured Credit Card. As I said at the beginning, this step might not be available to you right away if your credit is completely destroyed. Even so, you might qualify for an unsecured credit card sooner than you think--especially if you have already 12

14 started to build some good payment history using Steps 3 and 4. There are two types of unsecured cards. Bank Cards. Contact your banker or credit union officer. This is where being a customer and establishing a personal relationship at your local branch can count for something. Explain what you re trying to do, and why you want the card. These folks have good unsecured cards available through major servicing companies (Visa and Mastercard), and the rates and fees are favorable. Your bank or credit union might provide you with an unsecured card If you have checking and savings accounts with the bank that you have not overdrawn, and They know that you have other revolving accounts (secured cards or authorized user status on someone else s card) that are in good standing. If your credit is in the very early stages of recovery, then the limit on this first card is going to be really low maybe $500 or even less. That s OK. The point here is to get the card and use it sparingly. You ll want to pay the balance down to zero more often than not, but not all the time. It s important to leave a small balance on the card (less than 10% of the limit) once every few months. That way the CRAs will see that you re using the card and they ll give the maximum positive weight to your borrowing activity. Unsecured cards issued through such online companies as CitiBank, Chase, Capital One and Discover work the same as cards obtained directly through a local bank. These companies basically function as long-distance banks, so there isn t the opportunity for a personal relationship that might be available at a local branch; but otherwise their unsecured cards offer the same creditbuilding advantages as bank cards. Store Cards. This type of card includes department and big box store charge cards, as well as oil company cards. Sometimes called retail cards, store cards typically are easier to get than bank cards; but because of the heavy interest rates and fees, they are less desirable. Still, if you can t get a bank card just yet, this is a good option for the purpose of establishing credit. But don t just fill out the application at the store or gas station. You want to make sure you ll qualify first. Take the application home with you, call the company customer service folks, and tell them your situation. Tell them the truth (they re going to run an inquiry anyway if you apply), and ask if you re likely to get the card. Again, the idea here is to avoid an inquiry if you re going to be turned down. 13

15 If they say you ll likely be approved, make sure they report to all three CRAs. Step 6: Get an Installment Loan. As you already know if you re using The Credit Solution, it s important to have a mix in your credit profile. I can t overstate this point: You need more than one kind of loan account, and an installment loan is a vitally important ingredient in the recipe for good credit. If you want to take full advantage of my approach and build up a high credit score as quickly as possible, you need to get an installment loan. Before we get into exactly how to accomplish this, let s cover the basics. What is an Installment Loan? An installment loan is a loan that normally has these features: The loan is for a specific number of dollars. The amount of the loan is identified when the loan contract is signed, and the lender gives you that amount (the loan proceeds ). You agree to pay all of the money back, with interest, over a fixed period of time. Usually the payments are made monthly. The repayment period might be as short as one year; it might be as long as thirty years. When the loan is repaid, the account is closed and as far as that loan is concerned, the lender/borrower relationship ends. Secured or Unsecured. An installment loan might be secured or unsecured. By now, you already know what these terms mean. If the loan is secured, this means that the lender can seize the collateral if you don t pay. Car loans and home mortgages are both secured installment loans. If the loan isn t secured, there is no collateral. The lender still has plenty of ways to collect from you if you don t pay, but immediately grabbing your property isn t one of them. How to Get Your Installment Loan. This is where your bank or credit union relationship comes in. If you have an account already, your bank knows you. You re a customer. You can sit down with a loan officer and talk about what you want to do. Don t be afraid to discuss your purpose, which is to establish or build up your credit. There is no need to hide your intentions. Establishing or improving credit is a perfectly legitimate objective, and the fact that you understand this will only make you more credible. Here are some guidelines to help you through this step: 14

16 Try to get an unsecured loan if you can; but keep in mind that if you haven t done anything yet to establish or rehabilitate your credit, approval isn t likely. Still, it doesn t hurt to talk it over with your lender to get a preliminary sense of whether you might qualify (Just make sure you don t go beyond the talk stage until you know you ll be approved, because a formal application will result in an inquiry on your credit report.) From your point of view, an unsecured loan is the simplest, but it comes with some cautions: o First, and most important, this kind of loan only makes sense if you re absolutely certain that you have the cash flow to make the payments. You can t afford to get into trouble with this loan and fall behind. That will just hurt your credit. If you have any doubt whatsoever about your ability to handle the payments out of cash flow, then you should take the money (the loan proceeds), put it into a separate account in this very same bank or credit union, and just leave it there during the life of the loan contract. Remember, you re not borrowing this money because you need it or because you re going to spend it you re borrowing it to establish a loan repayment history with the credit bureaus. o Second, don t borrow a lot and don t borrow for a long term. Start with maybe $500 or $1,000 for a short period (but not too short). To get the maximum credit-building effect from the loan, it should have a term of at least 12 months. o Finally, don t forget to make sure that your bank reports all repayment activity to all three major CRAs Experian, Equifax and TransUnion. If they don t, that defeats your purpose and you need to find somewhere else to borrow the money. The easiest way to find out about this is to ask your loan officer. If he doesn t know the answer, he can easily make a phone call or get the information from his manager. If you can t get the loan officer to give you an unsecured loan, ask for a secured loan. There really isn t any reason why she should say no to you, because if the secured loan is structured right, there is no risk to the bank. Here are some ways this might work: o You can offer the loan proceeds as security for the loan. The loan contract will provide that 15

17 All of the loan proceeds will immediately be deposited into an account at the bank. This account will serve as the bank s collateral for the loan; You won t have the ability to withdraw from the deposit account while the loan remains unpaid, and If you don t pay as agreed, the bank can take the money out of your account and use it to pay off the loan. Ask your bank or credit union if it has a credit builder loan program for which you might be eligible. If it does, you ll find that the loan contract has exactly these features. They typically involve a small amount ($500-$1,000). With this approach, you ll need to come up with the payments out of your monthly cash flow. You won t be using the loan proceeds to make the payments. So again, make sure you can handle this. o An alternate twist on this same idea is to have the bank automatically take the monthly payments directly from this deposit account. Instead of you sending a check each month, the bank just withdraws the payment from the established account. This way you don t even have to remember to make the payments. The added advantage here is that there is no danger that you ll get behind or default on the account. It s bullet proof. o Finally, you can offer some other form of collateral as security for the loan. If you have a car that is paid off, for example, you could ask the bank to accept it as collateral for the loan (collateral and security are the same thing). You might be wondering about using a cosigner as a way to get a loan. I don t recommend this. If someone cosigns a loan with you, it s a great deal for you, but it s a terrible deal for the cosigner. That s because the cosigner is equally responsible for the debt. If payments are late, or if there is a default, it damages the cosigner s credit rating just as it does yours. The cosigner takes a huge risk, and gets no benefit. o If you re only borrowing the money in the first place because you want to establish a credit payment history, you won t need a cosigner. You should be able to get the loan using one of the 16

18 secured loan methods already discussed. o Cosigners are usually used when someone with no credit or bad credit is trying to buy something, like a car. You re not doing that. You have a very different purpose. Benefits of an Installment Loan. From the point of view of establishing credit, an installment loan has several benefits: It should be easy to get if you use the loan proceeds to secure the loan. If the bank gets paid through automatic withdrawal from a secured account, there is no risk to the bank at all. If you use the loan proceeds to make the payments, you don t have to worry about being late or defaulting on the account. If you make the payments out of cash flow, you always know exactly how much you need each month. There are no surprises. It will contribute to your credit mix. There is the possibility that because you are applying for new credit and your report will show a new inquiry, your score might drop just a little temporarily. This effect won t last. Your score will soon rise and be higher than it would be if you had only credit cards. Some General Principles. Here are some important points to keep in mind, regardless of which of these tools you use: Always, always, always make your payments on time. On revolving accounts, pay the balance down to zero most of the time, but not every month. There is an important reason why you need to leave a small balance (no more than ten percent of your limit) on your card from time to time. o Remember that the CRAs use a mathematical formula to calculate your FICO score. Apparently this formula mistakes a monthly zero balance for a complete lack of borrowing activity. o If you always run a zero balance, the formula thinks that you re not using your card at all and it assigns little or no positive weight to your payment activity. To be sure your account works to your credit-building benefit, you need to leave a small balance on the 17

19 card from time to time. o I know that always paying down to zero every month is excellent personal financial management, and normally the best financial management will help you build your credit. But in this case it won t. Leave a small balance on your cards from time to time, even if it runs against your instincts. Use your credit cards just enough to generate some activity and build a repayment history. The idea is to let them function as a credit-building tool, not to use them to buy things. When you use your cards, don t allow yourself to exceed 30% of the limit on any card at any time. This is critically important, and if you disregard it, you can really slow down your march toward a good score. For more on this, see The Credit Solution, Chapter 6. Don t apply for several cards all at once. Especially if your credit is completely on the rocks, you might be tempted to apply to several companies in the hope of being accepted by one or two. Don t do it. Every application will result in an inquiry on your credit report, and several inquiries can offset any credit score gains you might otherwise make. Take it one step at a time, and always call and interrogate the customer service reps first. You want to have a good idea whether you ll be accepted before you submit your application. Persistence will pay off. Just because you don t qualify for a bank Visa or Mastercard today doesn t mean you ll get the same answer in three months or six months. Use the tools you qualify for, make your payments, build up some history, and try again later. Variety is good, and to some extent more is good. Remember what I said earlier (and what I talk about in detail in The Credit Solution) about having a mix of loans and having more than one line of revolving credit. If you can, you want to have at least two installment loans and three credit cards. Some Credit Repair Methods to Avoid. There are some personal financial tools out there in the marketplace that might seem convenient and attractive, but that do nothing whatsoever to help you establish or improve your credit. I want to cover them here because I don t want you to waste your time and effort. 18

20 Debit Cards. Debit cards look and feel like credit cards, but they won t help your credit at all. Why not? Because none of the banks report debit card activity to the credit bureaus. They don t report because there is no credit involved you re not borrowing money. When you use a credit card, you re using the lender s money to buy things. You re borrowing. When you use a debit card, all you re doing is drawing down on an existing checking account balance. You re using your own money, not the bank s. There is nothing in the nature of repayment for your bank to report. From your bank s point of view, using your debit card is no different from writing a check. Prepaid Credit Cards. Depending on where you look on the internet, you might see offers suggesting that you can use a prepaid credit card to repair your credit score. Don t believe it. Even though this device calls itself a credit card, it is nothing of the kind. It is a debit card, period. Here s how these work: When you open the account, you deposit a sum of money with the credit card company. Sounds just like a secured credit card right? Wrong. The prepaid credit card company doesn t use your deposit as collateral for the loan the way a secured card company does; they use the money to actually pay for your purchase when you use the card. When you buy something, you draw down on your deposit balance right then and there, the same as you do when you use a debit card. These prepaid credit card companies don t report to the CRAs for the same reason that banks don t report debit card activity there is no borrowing involved. You re always using your own money. Prepaid credit cards are absolutely useless for building your FICO score, and they are carry exorbitant fees. Avoid them. Peer-to-Peer Lending. The internet has made it possible for enterprising private investors to offer to loan money directly to private citizens. They do this, without getting a bank or finance company involved, through so-called peer-to-peer lending sites. A couple of the best known are Prosper and Lending Club. The idea is that if you want to borrow some money, you post the amount you need on the site and private lenders compete for the opportunity to lend to you. This can be pretty enticing, but these sites are for people with pretty good credit. The reputable sites require a pretty high credit score (640 for Prosper and 660 for Lending Club) for participation. If you have no credit, or bad credit, these sites are a waste of time; plus, they run a credit check when you post your loan request. I recommend staying away from these sites, at least until you 19

21 have built up your credit to the point where you can participate. Guaranteed Acceptance Cards. If you see an offer for a credit card that guarantees approval, regardless of your credit, beware. Chances are that this is a fee harvester card meaning that it carries an enormous application fee and huge monthly or annual fees regardless of activity. These cards can carry very low limits, require a deposit, and cost hundreds of dollars a year. Often the card company doesn t even report to the CRAs. If you follow the steps I ve already covered, you shouldn t need this kind of card. Steer clear. Rent-to-Own Contracts. Technically, a rent-to-own contract (available in some places for purchasing furniture and appliances) is a loan, but you should avoid these no matter what. First, the terms are always awful--the interest alone might be twice what the item is worth. Second, you ll be adding to your expenses for no good reason. You don t want to do that when you re in the credit building phase of your financial life. Third, these companies almost never report to any of the big three CRAs; and if they do, the effect on your credit is probably negative. Don t forget that the purpose of the credit reporting system is to let your creditors know whether you handle your finances responsibly. If you are so desperate for a new sofa that you will pay twice or even three times what it s worth, this sends exactly the wrong message to the CRAs. Pay Day Loans. Avoid these like a plague, for all the reasons you should stay away from rent-to-own deals. A person who agrees to the horrific terms of a pay day loan is telling the whole world that his finances are completely out of control. You don t want one of these loans on your credit report. Loans from Retirement Plans or Insurance Policies. You might not have a retirement plan or a whole life insurance policy (if you re a young person just starting out you almost certainly don t), but I ll cover them both just to be safe. From the credit-building perspective, borrowing from a retirement plan or an insurance policy is a non-starter. The reason: you re borrowing from yourself. It s your money. Your repayments won t be reported to any CRA, and this won t help your score at all. Authorized User Piggyback Offers. Back three or four years ago, some enterprising people got the idea to offer authorized user status for a fee. These folks would open a legitimate credit card account, and for an enormous monthly charge, allow others (always people who desperately were trying to improve their credit) to become authorized users on the account. This worked 20

22 for awhile, but pretty soon the CRAs figured out what was happening. They soon started identifying these piggyback operations and refusing to use such accounts in calculating authorized user FICO scores. If you come across such an offer, don t be tempted. It will cost a fortune, and it won t help you. The CRAs are able to tell the difference between a legitimate authorized user and one who has signed up with a piggyback operation. The End Game. I hope you ve made a personal commitment to handling your finances responsibly and building your credit record. If you have, the materials you ve just covered will help you achieve your goals. I guarantee it. It s very possible to establish credit from scratch, and to repair damaged credit that bears the scars of hard times. I ve done it myself, thousands of others have done it, and you can do it too. The secret is in understanding how the credit reporting system works, and in learning to use all the tools I ve identified here to make the system work in your favor. Don t forget that these steps work best when they work together. You need to employ them all; each is a key ingredient in your recipe for credit success. Again, here are the key ideas at work: Your FICO score is calculated using all of your loan repayment activity over an extended period (seven to ten years). The FICO calculation weighs recent activity and events more heavily than older data. If you re repairing damaged credit, the process is really all about diluting the effects of negative events by making sure that recent positive activity gets into your record. Let s say you have a bankruptcy, and you have no recent good loan repayment activity in your report. In this case, the FICO calculator assigns a huge weight to the bankruptcy, and it keeps assigning it a huge weight as the months and years go by because there is nothing in your record to balance against it. You score is a disaster, and it remains a disaster. But if over time you establish some good payment histories, these will start to dilute the effect of your bankruptcy the good history will provide an antidote to the negative history. Within a couple of years, if your recent activity is strong and spotless, your score can dramatically 21

23 improve. This system is all about building up a recent positive history and avoiding the activities that can add negative items to your FICO calculation. If you follow the steps that I ve discussed, and if you avoid the pitfalls that I ve identified, you ll have success. This concludes my report on establishing and repairing credit from scratch. Now that you ve reached the end, I encourage you to go back to Step 1 and get started building or rebuilding your credit life. Good luck. 22