A Special Report by Laura Adams, author of Money Girl s Smart Moves to Grow Rich

Transcription

1 3 Strategies to Build Credit FAST A Special Report by Laura Adams, author of Money Girl s Smart Moves to Grow Rich

2 3 Strategies to Build Credit Fast Copyright 2011 SmartMovesToGrowRich.com All rights reserved. The information in this report is subject to change based on federal and state credit regulations. This material may not be duplicated, excerpted, or distributed without written permission. For permission requests, contact 2

3 WELCOME FROM LAURA ADAMS Thanks for downloading this special report about how to build your credit, fast! While you probably realize that your credit score is important what you may not know is that now more than ever, it s essential for achieving financial success. I created this report because after coaching and training hundreds of people, credit and credit scores still remain one of the most misunderstood and confusing aspects of personal finance. 3

4 There s a lot to know about credit and how credit scores work. So, if you re like many of my students, readers, and Money Girl podcast listeners, you also have many questions. Becoming educated about how credit really works is the only way to increase your credit score for life. When you understand exactly what influences your credit score (and by how much) you have the power to control your credit. When you are in charge of your credit, you ll never be under the thumb of lenders, insurers, landlords, employers, and even government programs that penalize you for having bad credit. Having credit you can be proud of gives you more opportunities not to mention more money in your pocket. The savings you ll achieve from being one of the credit elite can be the key to building lasting wealth. I ve structured this report into 3 sections or strategies that are guaranteed to help you increase your credit score as quickly as possible: 1. Correct Credit Errors 2. Adjust Credit Balances 3. Manage Your Credit Utilization 4

5 I m known for making money easy to understand and simple, so I m going to tell you how to use these 3 strategies in plain English. If you want to dive deeper into the topic of credit and debt, you can learn much more in my newest book, Money Girl s Smart Moves to Grow Rich. It s a complete guide to personal finance that s filled with tips, tools, and resources. It tells you what you need to know about money without bogging you down with what you don t. You can download 2 free chapters from the book at SmartMovesToGrowRich.com. My mission is to give you straightforward financial education that you can use to build wealth. So, let s get started by understanding 3 ways you can take control of your credit. All the Best, Laura Laura Adams Author, Money Girl s Smart Moves to Grow Rich Winner of the 2011 EIFLE Award (Excellence in Financial Literacy Education) 5

6 Strategy #1 Correct Credit Errors Why Credit Errors Matter By far, the easiest way to boost your credit score is to correct errors on your credit report. You might be surprised to know that the majority of consumers have errors in their credit files. A significant percentage of these errors negatively affect your credit, which has harmful effects that extend throughout your entire financial life. Here s why errors can show up in your credit report: Data providers (such as your lenders or credit card companies) can report inaccurate, negative payment history information by mistake. You may have made a payment on a car loan one or 2 days late, for instance, but it could be reported as 30 days late. Data providers can fail to add accurate, positive data or payment history information by mistake. For instance, you may have received an increased credit limit on a credit card that isn t reported. 6

7 Data providers can mix you up with someone who has a similar name or Social Security number. My sister-in-law is also named Laura Adams and some of my accounts accidently got reported on her credit report years ago! An identity thief can use your personal information, like your Social Security number or credit card number, to open new credit accounts in your name. When they rack up charges and don t pay the bills, the delinquent accounts are reported on your credit report. Both adults and children can become victims of this rapidly growing crime. You may see or hear ads for credit repair companies that guarantee to fix your credit. In most cases, these companies charge high prices and perform simple services that you can do for free. Consider a few of the far-reaching effects of having poor credit: Paying high interest rates: You ll either be turned down for new credit like a car loan, mortgage, or credit card or you ll be charged high interest rates. Having a low credit score tells creditors that you re a high credit risk and may not repay your debt. In exchange for taking additional credit risk, creditors protect themselves by charging you more interest, which means higher monthly payments. Paying high insurance premiums: You ll be quoted higher rates from insurance companies. Insurers consider consumers with poor credit to also be high insurance risks. 7

8 Paying high security deposits: You ll be asked to pay higher deposits for utilities, like power, gas, water, and phone accounts. Getting declined as a tenant: You could be turned down as a tenant for an apartment or house. Property management companies and individual landlords prefer to rent to people who demonstrate a good payment history. Getting denied for a job: You might be turned down for a job by an employer who requires a credit check to hire you. Employers can t get your actual credit score or see your entire credit report but they can find out if you ve had credit problems. So, even if you never use a credit card or take out a loan, you can see that having poor credit still affects your finances! The consequences of having to pay more or earn less, means that you end up with less discretionary income for yourself and your family. That means you might stay in debt for decades longer, never accumulate an emergency fund, or be forced to delay investing for retirement. The bottom line is that what s on your credit report has a ripple effect throughout your entire financial life. So, staying on top of your credit report and building your credit score should be one of your highest financial priorities. Remember that your credit lays a foundation that makes it much easier to build wealth and to have a secure financial future. 8

9 Understanding Your Credit Report Many people confuse credit reports and credit scores, so I want to make sure you re clear about what they are and how they work before getting into the nittygritty of how to correct errors on your credit report. Your credit report is your financial resume; it contains details about your credit accounts and whether you ve made payments on time. It also shows whether you have any derogatory legal items, like an arrest, bankruptcy, lien, or judgment. Your credit report contains your personal identifying information as well, like your address and Social Security number. Credit reporting companies sell the information in your report to potential creditors, insurers, landlords, employers, and other businesses that use it to legitimately evaluate you. Since you need to know what information is being shared with these companies, federal law allows you to get a free copy of your credit report once a year from each of the 3 nationwide credit reporting agencies, Equifax, Experian, and TransUnion. 9

10 Getting Your Free Credit Report Getting your free credit report is very easy and I show you exactly how to do it in the video called How to Check Your Credit Report that s included in the Credit Score Survival Kit. I let you look over my shoulder as I check my own credit report at annualcreditreport.com so you can see how easy it is. Annualcreditreport.com was created by the 3 credit reporting agencies to make it easy for consumers to pull their free credit report each year. To order your free report by phone, you can call To order it by mail complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box , Atlanta, GA Here are some situations in which you might be eligible to receive a free credit report more than once a year: If a company takes adverse action against you such as denying your application for credit, increasing your interest rate, or decreasing your credit limit due to information in your credit report. You must ask for your free credit report within 60 days of receiving notification about an adverse action. If a company denies your application for insurance, housing, or employment based on information in your credit report. Again, you must ask for your free report within 60 days of getting notification about the denial. 10

11 If you re unemployed and plan to look for a job within 60 days or if you re receiving welfare assistance. If you believe your credit report contains inaccuracies due to fraud, including identity theft. If you live in Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, or Vermont, where state law gives you free access to your credit reports even if you are not denied credit. 11

12 Understanding Your Credit Score Your credit score is a number that s used to help companies and individuals decide whether they want to do business with you and how much they ll charge you. Your score is built on your credit history that s found in your credit report. One of the most confusing things about your credit score is that there isn t just one credit score. Believe it or not, it s estimated that there are over 1,000 different credit scoring models used by different companies! So your credit score number depends on which scoring model is used. Mortgage lenders use different scoring models than insurance companies and auto lenders. Without going into detail about all the common credit scoring models, you simply need to know that they re calculated using the data that s in your credit report. In other words, no matter who pulls your credit or what credit scoring model they use, it all comes back to the data in your credit report. When your credit report data isn t correct, you re simply not being evaluated fairly. 12

13 Getting Your Free Credit Score You ll notice that your credit report does not include your credit SCORE. Many people get upset when they find out that getting their free credit report doesn t entitle them to a free credit score as well. The credit bureaus typically offer a free credit score but read the fine print carefully! These free offers typically have strings attached like a recurring monthly membership fee for their credit monitoring service. You have to enter your credit card number to sign up and then go through the hassle of canceling the service later on, if you don t want it. However, I want to share a little-known resource with you that I use to really get my credit score for free. There are no strings attached you don t have to enter a credit card number or any identifying information. And the best part is that you can pull your credit score as often as you want and monitor it for free. I get my credit score about once a month from this service so I can see if it dropped for any reason. The only catch is that the site is funded by sponsors and it makes product recommendations when you log in. That doesn t bother me because you can just ignore them and click a button that says update my credit score for instant access to your credit score as often as you want it. 13

14 Getting my credit score for free saves me about $200 each year! Click here to get your free credit score. 14

15 How to Correct Errors on Your Credit Report The good news is that getting errors corrected on your credit report is easy, fast, and free. The Fair Credit Reporting Act (FCRA) is a federal law that promotes the accuracy and privacy of the information in your credit report. You have the right to challenge inaccuracies and to have them corrected. Start by pulling your free credit report from annualcreditreport.com and reviewing it carefully. The fastest way to resolve an error is to dispute it online by clicking a button or link that says Report an Inaccuracy or Dispute an Error. Let s say you print out your credit report and leave the annualcreditreport.com web site. If you review your printed report and find an error later on, you can always visit the credit agency web site directly to report an inaccuracy: Experian TransUnion Equifax

16 When you dispute an entry on your credit report, you have the opportunity to select a reason why you believe the information is inaccurate and to add any additional facts. The credit bureau will verify the error with the company that reported it to them. As soon as the credit bureau closes the investigation, they send you the results. If you ask, the credit agency must send notices of corrections to any person or company who received a copy of your report within the past 6 months. If your credit report was pulled for employment purposes, they must send a corrected copy to anyone who received it within the past 2 years. If you don t agree with the results of a credit report dispute, you have the right to add a 100-word consumer statement to your credit file explaining your side of the story. However, you should also contact the data provider to work with them directly to resolve the dispute, if at all possible. Adding a statement of dispute should be done as a last resort but creditors or other companies who check your credit file may take your statement into consideration.. To sum up Strategy #1, Correct Credit Errors, you must remove all negative items from your credit file because they suppress your credit score. Removing negative data instantly improves your credit and your entire financial situation! 16

17 Strategy #2 Adjust Credit Balances Why Credit Balances Matter Now that you understand more about the important role of your credit report and score and know how to correct errors in your report, let s cover another powerful way to improve your credit. The second strategy to implement is to adjust your credit balances. This can significantly boost your credit score because the amount of debt you owe is one of the biggest factors that scoring models use. The reason credit scoring models evaluate how much debt you have is because it can affect your ability to pay all your credit obligations on time each month. Having debt doesn t automatically make you a high credit risk, however. You must have some amount of debt to demonstrate your credit-worthiness and to build a good credit history. But having too much debt increases the probability that you might have financial problems in the future and be unable to pay your bills. 17

18 The increased probability of risk that s inferred from having higher amounts of debt (even if you can afford to make the payments) can result in receiving a lower credit score. Remember, your credit score is simply a number that s used to predict how well you ll handle future credit and make debt payments on time. 18

19 Pay Down Your Credit Balances The most obvious way to reduce your credit balances is to pay them down. For instance, let s say you have a credit card with a $15,000 balance. Paying down as much of that balance as possible can boost your credit score quickly. Here are some ways to pay down your credit balances: Use cash you may have in a savings account Raise cash by selling some of your unused personal belongings Get a loan that won t be reported on your credit report, like one from a friend or family member Suspend payments to your workplace retirement plan or IRA and use that money to get rid of your debt. Then you can resume making retirement contributions once your credit balances are reduced and your credit score is up. (By the way, I don t recommend that you cash out or take a loan from a retirement account to pay down your debt.) You might be wondering about the optimal amount of debt that you should have. Unfortunately, I can t give you a specific number because it depends on many other factors, like how long you ve had credit, and on the particular credit scoring model that s being used to evaluate your credit history. 19

20 Different Types of Credit When you re considering which credit balances to pay down, it s important to know that not all credit accounts are considered equal when it comes to your credit score. There are 2 basic types of credit: revolving debt and installment debt. Let me explain how they re different and how they affect your credit score. Revolving debt is an agreement you have with a credit company for a maximum loan amount. You can use any amount of the funds as needed any time you like. Then you make minimum monthly payments that typically range from 3% to 5% of your total account balance. There s no loan term or final due date on revolving debt. Credit cards, retail store cards, and home equity lines of credit are common types of revolving credit. For example, if you receive a credit card with a $5,000 credit limit, you can use it to spend up to $5,000. In some cases, you can spend more than your credit card limit if you agree to pay an over-limit fee. If you don t give your consent to pay an over-limit fee, however, any credit card charges you make that exceed your credit limit will be declined. Installment debt is an agreement you have with a credit company for a specific loan amount. You receive the full amount upfront with the condition that you make regular payments until the original loan amount (also known as the principal) and interest is paid in full. Car loans, student loans, and mortgages are common types of installment credit. 20

21 For instance, if you receive a car loan for $20,000, you receive that full amount to purchase a vehicle and then make scheduled monthly payments based on the interest rate and term of the loan. For a 5-year, $20,000 loan with an 8% annual interest rate, your payment would be just over $402 per month. What s interesting is that many credit scoring models give more weight to revolving credit balances than to installment loan balances. Since credit cards are the most common type of revolving debt, how you use credit cards can result in the most benefit or damage to your credit score when compared to any other type of credit that you use. Therefore, after correcting errors on your credit report, the next step you should take to raise your credit score is to pay down your credit card balances. If your credit score is low, you re probably paying very high interest rates on your cards right now. So, not only will paying down credit cards help boost your credit score, but it ll save you a bundle in interest. Once you build a higher credit score, you can qualify for better credit cards that charge lower interest rates. To sum up Strategy #2, Adjust Credit Balances, you should work to reduce the total amount of debt that you owe, especially on revolving accounts, such as credit cards. Lowering your outstanding debt improves your credit and your entire financial situation! 21

22 Strategy #3 Manage Your Credit Utilization Why Credit Utilization Matters Maybe you d love to pay down your credit card balances or pay off your car or student loan today but you simply don t have the cash to do it. If you can t reduce the amount you owe creditors, you might be surprised to know that there s another way to adjust your credit balances that will also raise your credit score! When it comes to your revolving credit accounts (such as credit cards, retail store cards, and home equity lines of credit), credit scoring models analyze your credit utilization, which is also known as your debt-to-credit ratio. Your credit utilization is simply the amount of credit you ve used relative to the amount you were given. For example, if you have a credit card with a $1,000 credit limit and have a $500 balance, you re using half of your credit limit or 50%. Dividing your current card balance by your available credit limit gives you your credit utilization ratio: 22

23 $500 current balance / $1,000 available credit limit = 0.50 = 50% credit utilization ratio In general, having a lower credit utilization ratio is better for your credit score. By demonstrating that you manage your available credit responsibly by not maxing it out, creditors consider you a lower credit risk. On the other hand, if you max out your credit cards and other lines of credit, you ll be considered less credit-worthy because it s possible that you could be in financial trouble and have difficulty paying your bills. 23

24 Optimal Credit Utilization So now that you know that using less of your available credit on your revolving accounts is better for your credit score how low should you go? Having a credit utilization rate of 50% used to be considered good but not anymore. Several years ago the recommendation dropped to 35%, then 30%, and now you should maintain a credit card balance that s no higher than 20% to 25% of your available credit limit. Therefore, if you have a credit card with a $1,000 credit limit, don t rack up a balance that exceeds $200 ($1,000 x 20%). Having a low utilization rate is important whether you carry a balance from month to month or pay it off in full. Paying off your entire credit card balance each month is a great way to boost your credit; however, making charges that exceed 20% to 25% of your credit limit can work against you. Here s why: Credit agencies typically update your credit file with transactions reported to them from your creditors once a month they don t keep up with your daily transactions or balances. Credit card companies report the following information to the credit agencies about you each month: 24

25 1. Your account balance as of a certain date each month 2. Your available credit limit 3. Whether your monthly payment was received on time or not You simply can t control when your credit score is calculated it could be figured using information in your credit file on any day of the month. Credit scores are calculated as a snapshot in time. So if you have a $1,000 credit limit and typically charge about $800 each month, your score could be calculated as follows: $800 current balance / $1,000 available credit limit = 0.80 = 80% credit utilization ratio That s a high utilization ratio that can hurt your credit score. 25

26 How to Manage Your Credit Utilization But what if you need to use more than 20% of your available credit limit each month or you can t pay down your balance below that utilization amount? There are many ways to boost your credit score by simply managing your credit utilization, but one of the best strategies is to request an increased credit limit from your credit card company. If you ve been a good customer and are making on time monthly payments, your card company may gladly increase your credit limit. Most of the major card companies have an automated process on their web site for processing credit limit increase requests. It can be as easy as logging in and clicking a button. If you don t have the option to request a credit limit increase online, call your card company s customer service number and speak to a representative about the process for raising your available credit limit. Here s what happens if your credit limit is increased from $1,000 to $2,000 and you charge no more than $500 per month: $500 current balance / $2,000 available credit limit = 0.25 = 25% credit utilization ratio That s much better than 80%! When you raise your available credit limit, you can reduce your utilization ratio, which instantly boosts your credit score. 26

27 To sum up Strategy #3, Manage Your Credit Utilization, you should work to reduce the amount of revolving credit that you use relative to the amount you ve been given. Keeping your credit card balances below 20% to 25% of your available credit limits improves your credit and your entire financial situation! 27

28 Your Next Steps To Build Credit Fast Now that you have 3 top strategies to increase your credit score fast, it s up to you to take action. Here they are again: 1. Correct Credit Errors 2. Adjust Credit Balances 3. Manage Your Credit Utilization Don t get bogged down with trying to do too much at once. Start by getting your free credit SCORE to see where you stand today. Then pull your free credit REPORT to take a look under the hood of your credit and get any errors on your credit file corrected. After you know what s on your credit report you can take a look at your current balances and make a plan for how you can reduce them and take control of your credit utilization. 28

29 Though this report has just scratched the surface of your credit, I ve given you some powerful ways to get started so you can begin to enjoy the financial benefits that come from having a high credit score as quickly as possible. Read this report again if you re unclear about any of the points I ve covered. If you have additional questions about credit, feel free to contact me at laura@smartmovestogrowrich.com. Here s to having a great credit score and building more wealth for a secure and happy financial future! Laura Laura Adams Author, Money Girl s Smart Moves to Grow Rich Winner of the 2011 EIFLE Award (Excellence in Financial Literacy Education) 29