The 12 Days to Increasing YOUR Credit Score

After giving a presentation like this on campuses on the West Coast as well as various church congregations, I thought it would be wise to post this on my blog for those interested in finding ways to increase your credit score and preparing for those big purchases or that day when you will need to consolidate. So here is a rough list of things that you can do to increase your credit score BEFORE you call your broker or that mortgage company or buy a car as well as some helpful information:

1. When you go shopping, leave your credit card home.
Now why would I do that??
Well not only are you 100% more likely to make a purchase if you have a credit card with you, but did you know on average it will cost you 112% of the purchase price? That’s right…even though that sale may look good at 10% off, when you put it on that credit card and don’t pay it off at the end of the month, guess what: that great sales price not only disappeared, but ended up costing you more than you were willing to pay for it in the first place. Who wins? Your credit card company wins! It’s no wonder more and more stores out there offer you 10% discounts to use their card because they know you will pay more in the long run than the sales price anyway! So just bring your debit card and use only the budget you have, or go with the checkbook (if you use that sort of thing).

2. When you get that mail piece in the mail of being ‘pre-qualified’, you are actually known as a revolver.
Steve: What the heck is a revolver? (not a gun by the way) How do you know I am a revolver?
Okay…let me explain. If you had a business idea that you could advertise and sell for say $10, but once the buyer came and bought it you ended up selling it for $15, wouldn’t that make you happy knowing you made $5 more than you originally wanted? Of course it would! Revolvers are people that like to hold balances on their credit cards and end up being a credit card company’s most profitable client. They always pay their credit cards on time, but never in full. In other words, I don’t pay off my entire bill at the end of the month. Credit card companies love this. They can access data and see what you purchase every day and why you purchase it and mail you something that appeals to those senses. They actually do research on you to determine how much you will make them before they even market to you. But in reality, they only see you as a revolver where they can advertise $10, but you end up paying $15. So in essence, when they say you are pre-qualified, what they are really saying is: “Hey, I can make a lot of money from you because you are not too smart with your money. You should sign up!” The sad part is if you have a balance on your credit card as you read this, you’ve already been had. I thought about starting a Revolvers Anonymous in my local area…what do you think?

3. Would you borrow money at 20-25% interest?
I certainly hope not! But the sad part again is that if you have a balance on your credit card as you read this then that is what you are doing. You are borrowing money from your credit card company for an average of 20%! How crazy is that? Today’s average consumer not only pays 19.83%, but it accumulates daily and is compounded (so take that number and divide it by 365 to get .05% daily).
For example, imagine for a moment that you could open a bank account that earned about .05% every day of the year and it compounded daily. At the end of one year, only $1 that you add once would become $6.17 at the end of the year. Or in bigger numbers, you put in $10,000 on Jan 1st, and on Dec 31st you now have an account with $61,746 in it. WOW! Maybe I should start my own credit card company…

4. Do you even know your credit score?
Only 2% of Americans do, and only 3% can actually name the three credit bureaus that contribute in determining your score. So it would be wise to learn about your credit score and what it is, as well as getting your credit report once every 6 months. Since all three bureaus (Equifax, Trans Union and Experian) each allow a free credit report once per year, getting at least 2 checks a year should not be difficult and won’t cost a thing. Now they may charge about $7 to get your score included with the report, but it is well worth it! (The score is separate from your report. The report lists every loan, credit card, etc you have outstanding or have had in the past and the balances while your credit score is your 3 digit score, max of 850). If you fall below the 640 mark, you are going to find that difficulties lie ahead. So, the next few points will be ways you can increase your score over the next 6 months to a year and beyond.

5. How many credit cards do you have and with whom?
Before you read on, you should sit down and have this list ready to go. (If you know the balances as well, that would be helpful too). You see, part of your score is determined by payment history, amounts owed, and new credit that you open up, but 25% of your score is determined by the length of your credit history and the types of credit you use. By understanding these last two items mentioned that affect 25% of your score, you can boost your score incredibly in this New Year coming up. Think about the affect that this is going to have on that new home purchase or vehicle that you may be thinking about, or even in consolidating bills or paying off that debt you are thinking about. If you did your free credit report like I mentioned in #4, you will have this information on balances and such available to you already.

6. Which credit cards do I keep?
Great question! Visa, MasterCard, Discover and American Express you should keep open indefinitely. DON’T SHUT THEM DOWN. Why? Because guess what? Your history is important and if you are closing and opening up new credit cards, you are hurting your history (which is why balance transfers can be tricky because you will be tempted to shut the other card down that you took the balance from).
KEEP IT OPEN! Just don’t add new balances to it and don’t take it with you (see #1 above). Keep it open to maintain a good history of usage, even if it is to make one purchase a month (gas for example) and pay it off and keep it at that.

7. Which credit cards do I close down entirely and never get again?
NEVER, EVER get a store credit card. (Such as Gap, Old Navy, Lowe’s, Home Depot, Sears, Wal-Mart, Target, RC Willey, IKEA, etc.) If you have them, pay them off quickly and SHUT THEM DOWN!
But Steve!
I get 10% off my next several purchases, or I got a free t-shirt, or no payments for 6 months, or no interest for 6 months, etc!
So what!
These types of cards not only have higher percentages of interest on average (upwards of 26%) but are a type of revolving debt that makes you that ideal revolver for the credit card companies. Plus, if you have balances on these cards, guess what is happening? Your credit score is going down, down, down. Plus, the temptation is higher because of the fun features that they give you. Don’t give in! Don’t get addicted! Don’t be a revolver! Just because someone offers you cocaine doesn’t mean you have to inhale it…even if I do give you a free t-shirt 🙂
So start paying those off first and shut them down, call and cancel, write a letter, whatever it takes. The next time you get your credit report, make sure they are gone as well.

8. Call every 6 -12 months to increase your spending limits on your GOOD cards.
Now Steve…that sounds silly…How is that going to increase my credit score?
It all has to do with the available balance to you. By having a high available balance, you increase your score. Now here’s the catch: Just because you call and increase your limit doesn’t mean you are supposed to spend more.
Duh!
You must increase your limit, but don’t take that as a sign to spend more. That is a big NO-NO. We are trying to boost your score, not get you into more debt. Plus, you could probably call and see if they would be willing to decrease your interest rate. You should try that on cards you do have balances on. It never hurts, and you will begin to educate yourself even more and what you would need to do to get the lower interest rates on your cards. I actually tried it with a friend of mine and by the end of the evening, she had knocked a total of 7% in interest on a few of her cards combined. Not bad for just making a few phones calls for an hour!

9. Avoid too many credit inquiries
Try to limit this as much as possible (but don’t think if you are buying a home that you shouldn’t shop around. These types of checks do not affect you by the way, nor do checks from landlords if you are moving in to a rental unit. The credit bureaus allow such searches without penalties). What I truly mean by this is don’t sign up for every free t-shirt at every available kiosk at the mall. It is unnecessary to have others snooping into your credit just because you want a cool t-shirt with a palm tree on it. Also, don’t go signing up online for credit cards, or those websites that give a free car or laptop computer as long as you sign up for a ton of things first. YIKES!

10. Do not co-sign for another person’s loan.
Big no-no. Unless it is a spouse of course, but even then I caution you not to always put both your names on it as your spouse’s credit score could keep you from making some purchases (such as a vehicle, home, etc). Use your own discretion, but never sign for a friend, roommate, etc. What if they disappear off the face of the planet and leave you with bad debt for something you never got to enjoy? (Such as the car my sister cosigned for and eventually paid the balance in full and never got to see the car. It’s a real sore spot for her, so don’t ask her about it or bring it up please!).

11. Avoid for-profit credit counseling services.
Why is that? Because this has a negative effect on your credit score. Your reading this is a good start, and I promise it will help you incredibly this year. In fact, if there are those here that read this and do it, please email me your success stories! I would love to hear them!

12. Track, track, track
It is time to keep track of your spending habits. You know something really sad is when I have individuals contact me about their debt and there are times when they are surprised to find out about that $8,000 on a Gap card, or $12,000 with Old Navy that their spouse never told them about. BOTH of you need to be involved if you are in a relationship, even if your husband or wife has no idea what they are doing. Patience and involving them is huge, and while the divorce rate is rising to upwards of 60% of marriages failing in this country, the number one reason for marital discord is financial issues. You know what is interesting as well? In the ’70s when there was a big push for credit cards, divorce rates were around 16-17%. It is amazing to me that as you saw more credit cards being used in homes across the country that the divorce rate increased at almost the exact same rate…I wonder if when the banks and credit card companies were so busy ‘finding revolvers’ to make a lot of money ever thought about what that would do to the American Family.

So there you have it…the 12 Days of Increasing your Credit Scores. With the New Year coming up, I know there is a lot of shopping and the like to be done, but just remember, there are ways to go about doing it, and I am sure your family would be much happier with you being financially free and in a stable relationship than you spending a fortune getting them that golden spatula that they always wanted. Plus, by the following year, you will probably be able to afford to get them something better anyway. It’s worth it!

I do have a small update on this article and I want to thank those of you who have sent me your emails. When I originally posted this article on my first blog and got it published back in December 2006, I started to receive thank you emails about 6 months later. So far, the average increase for those who have written me about their experience in applying these principles I have outlined is almost 60 points this past year. So please do let me know your story!

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