Improve Credit Scores

Ways to Improve Credit Scores Right Now (Cont'd)

Reestablish Credit

You can start down your road to recovery right away by placing as much distance as possible between you and your bad credit. The specific actions you can take toward this end are as follows:

• Always pay your bills on time, without exception.

• Open two (but no more) unsecured credit card accounts. If you can't get unsecured cards, then seek the help of a cosigner. (Unsecured and secured credit cards are viewed the same by FICO, but unsecured cards often have their limits raised automatically, which is good for FICO scoring.)

• Convert secured credit cards to unsecured ones when possible. This usually becomes an option only six months after opening the account, provided there haven't been any late payments.

• For those with poor credit who are unable to obtain unsecured cards, open secured cards, which require a cash deposit. With secured cards, your credit limit is often the amount on deposit but can be less or more. Piggyback secured cards, if need be, by taking out a cash advance on the first credit card you open and then depositing that money in another bank in order to get approval for another secured card. Just be sure to obtain the secured cards from creditors who report to all the bureaus and ones that also report their secured accounts as unsecured to the credit bureaus. (See "Getting Approved under Adverse Conditions" below for more information on banks that do this.)

• You can also get a debit card (also known as a check card), which basically takes any purchase right out of your checking account, making the balance in the account your limit. Although debit cards aren't reported to the bureaus, they can make it easier to function by providing a way to conveniently pay for things, such as online purchases, for example. Further, when attempting to reestablish yourself, it helps to have a checking account to pay bills in a cost-effective fashion. Studies have shown that those who've opted out of the banking system entirely due to bad credit end up paying a lot more in transaction fees (e.g., the added cost of money orders, payday lenders, check cashing stores, etc.) than those that remain in the banking system. If banks will not permit you to open an account because you have a bad history with ChexSystems (a checking account credit reporting agency), get back into the banking system as soon as possible using the techniques spelled out in Chapter 10.

• Make sure that you have both a savings and checking account, and use the checking account to pay your bills. Never, ever write a bad check. Get online bill-pay, as this will assist you in making payments on time. Online bill-pay enables users to automate recurring payments and set up e-mail reminders, among other features.

• Get overdraft protection if possible. You can either use a credit card with that bank, or many banks now permit anyone with a debit card to overdraft-draw from a credit card issued from any bank. Overdraft protection is useful for many reasons. Those you write checks to won't ever receive a bad check, and you can avoid ever having to pay insufficient funds fees to both your bank and the receiving party. Further, banks that provide overdraft protection to their issued cards will often report them as a line of credit, which is another tradeline entry generated on your credit reports. And finally, those who have insufficient funds are often reported to ChexSystems, and this can be avoided when overdraft protection is in place. Just be advised that any request for overdraft protection directly from the bank is a request for a line of credit and will generate a credit inquiry. (Of course, if the bank permits the use of an existing credit card for overdraft protection, then no inquiry is generated.)

• Open a certificate of deposit (CD), which is a good way to establish good relations with a bank. The minimum CD is usually $1,000 with a six-month term, which means that you can't take the money out before the term is up or you'll pay a penalty. Immediately or within a short period after opening a CD, you can borrow against it through the bank you opened it with; that is, obtain an installment loan using the CD as security. The bank will report this to the bureaus as a secured installment loan. Make the payments on time without fail.

• Stay put! If you can avoid it, don't change jobs. This affects your ability to get credit, particularly if you have bad credit already.

For many different reasons, those with a checkered credit past-even those with a lot of money-often drop out of the credit reporting system altogether, opting instead to use cash to pay for everything. Even if you have a bad credit history, this is the last thing you want to do; it just makes things worse. It's something people inevitably regret, since credit approval involves not only good credit but also recent credit. Keep two or three accounts open and in good standing, preferably a mix of revolving and installment accounts (e.g., one or two credit cards and one auto loan).

Establish Years of Good Credit Where None Existed Before

This little-known secret absolutely takes the cake. It's so simple and powerful, yet hardly anyone knows about it! Simply follow these steps:

1. Locate a friend or family member with a Visa or MasterCard that is in perfect standing.

2. Convince him or her to assign you as a secondary cardholder. (You might do so by agreeing to turn over the card once it comes in the mail so you will never use it. Or use whatever means of negotiating a deal that you think will be most effective.) This is referred to as a "user account." Be advised-the one responsible for any charges is the account holder, not the added user.

3. Once you've sealed the deal, get a copy of the person's credit report and make sure the account is in good standing. This may seem presumptuous, but (a) if he or she is willing to do such a thing then you're already darn familiar anyway, and (b) you can't risk adding negative credit to your own.

4. Once you're satisfied that the account is in good standing, have the person send a letter to the card issuer requesting that you be added to the account as a secondary cardholder and stating in writing that he or she will take responsibility for paying the balance.

5. The new card should arrive within a few weeks, or you may just receive an application or request for additional information. Either way, it is usually sent to the primary cardholder. If an application is required, you will fill out the coapplicant part. The card should arrive soon!

6. Wait 90 days and then order a copy of your report. It should show the credit card in good standing, open for as long as the original primary cardholder had it. Nuts!

Be aware that if the primary cardholder becomes delinquent, the negative history shows up on your report! Moreover, balances can negatively affect your score; if the primary cardholder carries large balances, this can be harmful to your credit score. And while any new credit can harm a score initially, it would appear that this doesn't show up as new credit, since the opened date will be that of the original cardholder's account. Be aware that an inquiry will likely be performed on your credit report, though the benefits for someone needing to generate a longer good credit history will far outweigh any downside.

FICO scores user accounts, and since they add points for length of credit history, length of open credit history, and good payment history, it makes this technique all the more powerful.

User accounts can be deleted from a person's credit file at any time, because bureaus aren't required to report individuals who aren't contractually liable for a debt. In this way, the "user" of a user account gets to have his cake and eat it too, as he can have it reported when in good standing and deleted if things go south.

Have Credit Limits Raised

Contact your creditors and ask them to raise the limits on your accounts as much as possible. Although they'll perform a credit check, such inquiries don't affect a credit score. Account limits can usually be raised every six months, up to a cap determined by the issuing bank.

Most standard cards have a cap of $5,000, while platinum cards are often capped at $25,000. Banks are more likely to raise credit limits for those with good credit, of course, and for those who report an increase in income. Incidentally, they don't verify increases in income for existing customers.

Remove Inaccurate Adverse Information

One of the fastest ways to improve a score is to remove any inaccurate adverse information, including late payments and public records. There are many ways in which inaccurate data can end up on your report, including a mistake by a furnisher or a credit bureau database glitch. Identity theft may even be the culprit if someone has stolen your SSN and obtained new credit in your name. Erroneous information can come in many forms, such as duplicate accounts, the reporting of obsolete information, and entries that are simply not yours. Detailed information on how to remove inaccurate adverse information is covered in Chapter 11.

Request Rapid Rescoring

In the event that you discover something on a report is erroneous when you're in the process of seeking loan approval, there's a quick remedy, provided you can prove the information is invalid.

To have rapid rescoring performed,

1. you have to be a prospective customer of a lender or mortgage broker,

2. the lender must be a customer of a reseller (one who partners with a credit reporting agency to provide credit reports), and

3. the lender must request the reseller's help on your behalf.

Since very few lenders use resellers, this is difficult. Further, a conflict of interest exists, since the lender actually makes more money if the interest rate is higher due to a client's lower score. If approval will occur in spite of the negative entry, then there's little impetus for the lender to request a rescore. Reputable lenders will always get the best deal for their clients, of course.

Resellers are also often versed on scoring and may be able to come up with a game plan for raising your score. However, the main requirement for rapid rescoring is that the consumer must provide proof (e.g., court documents, payment receipts, or letters from creditors) to the lender that accounts are reported inaccurately. The lender will then forward the documentation to the reseller, which will then make changes directly to the individual's bureau files within a three-day period.

Each change will often run from $25 to $100, for an average of $200 to $300 total per client, and the bureaus have rules that prohibit these fees from being passed on to the borrower. As such, the lender must absorb the cost. Though there's no way for the bureaus to know if their rules are being followed, discovery of any breach can always occur as the result of a consumer's interfacing with a bureau on the issue, and bureaus can either warn any offender or simply close the reseller account at their discretion.