When I was younger, before I became an entrepreneur, I had the privilege to work for one of the biggest financial & credit companies in the world. During my time there, I was able to learn many useful tricks into having and maintaining impeccable credit, and these lessons have tremendously helped me later in life, not only for personal reasons, but for business reasons as I was setting up my company. I thought I’d take this opportunity to share with you some of the knowledge I acquired along the way:
Your score is mostly meaningless
What? Most people tell you that your credit score is important right? Well, it is and it isn’t! What I mean by this is that unless you seek credit, your score is worth absolutely nothing. If you never plan on getting a mortgage, getting a car loan, or using credit cards, your FICO score will have absolutely no impact whatsoever in your life. Believe me, I know people that do not use credit at all, and any knowledge of credit scores and the likes is a foreign language to them. What is important to know, is how to manipulate your credit score prior to seeking credit, so that by the time you are ready to ask for credit, your score is where you want it to be. The rest of the time, your score could be anything, it will have no impact in your life.
If you need to apply for credit, make sure that:
– it’s the end of a loan you may have. For example, your score will be better when you are almost done paying a loan like your car, than at the beginning when you had just got it. This is due to the fact that at the beginning, you are allocated let’s say $20,000 for the loan, and you owe the full amount. This is viewed the same as a full credit card. So at the end of the loan, you may only owe $500 on the $20,000 loan, so it looks much better and your score goes up. Never apply for credit when you just got a new loan, it will just destroy your chances of getting it.
– you keep your credit card balances under 30%. I would even go as far as saying that it should be 10%. You see, the more your limit is taken up, the worse your score is. So a few months prior to you applying for credit, make sure that you pay off your balances. I say a few months because it takes awhile for your credit report to be updated and show that the trend is more than just a one month fluke.
– you lower limits on unused accounts. You may have accounts that you barely use. Do not close them. You acquired history with these accounts, and the longer it is open, the better it is for your score. Just lower your limit, as it will reduce your potential debt ratio. You see, before financial institutions give you a loan or a credit line, they look at how badly you can get yourself in debt the next day if you choose to. For example, if I have $30,000 in available credit that I can freely use, there is nothing that can stop me from going to the store and putting myself in debt for that $30,000. Companies are aware of this, and it weighs heavily on their decision to give you more credit. So keep your available credit limits low but keep them open, as this will help your score and your chances of approval for your new credit application.
Never ever miss a payment
This is more or less, a way of life! I always told myself that no matter what would happen in my life, I would never ever miss a payment for any credit I owe. The reason is that once you miss a payment, you are pretty much “flagged” in their system and this stays on record for quite a while. As a matter of fact, I will boldly recommend that it is better to borrow money to make a minimum payment, than it is to miss that payment. If you find yourself in a predicament and you cannot make a mortgage or car payment, get a cash advance from your credit card and make your payment. Now, I know that this technique is frowned upon by anyone in the credit industry, but trust me, it works because when you do a cash advance, they do not know what you use it for. Of course, do not do this every month! Once or twice just to make sure you do not miss a payment…it’s worth it.
Never open a joint credit account
Unless it is your parent, or someone that you are 100% certain will not default and leave you with the problems, do not, under any condition open a joint account with anyone. I have seen terrible consequences where people dating had credit card debts together. Once the relationship sours, all hell breaks loose, and the impact it has on your credit cannot be fixed or explained away. Along the same lines, do not give additional cards to your kids or your friends unless you are sure that you have a way to get your money when it will be required. You can’t chance this. You see, credit companies know that the default on additional cards is big, and they make quite a bit of money on the interest you end up paying…this is why they always ask you if you want to give out additional cards. They know it’s a gold mine for them. But for you, it can mean long lasting smears on your credit report.
Avoid retail store cards or “pay later” credit
Retail store cards bring your credit score down. They are seen as lower tiered cards, and any use of those cards will make your score lower than if you didn’t have them, regardless of how well you make your minimum payments. If you need to buy something with credit, use a Visa, MasterCard, AMEX, or Discover. Those are seen as the top tiered cards that will not bring your score down with its use. Another point I want to make is to never buy something that you cannot afford right now. All those “buy now, pay next year” schemes bring your credit score down as well. Plus, you better believe that they are only waiting for you to default on it, so they can charge you retroactive interest at a ridiculous rate of 30% and over. You will do yourself a favor if you save a little each month and buy it when you have the money. At worse, get a low interest on your Visa or MC and make your purchase with such a card and pay it slowly. I actually prefer to pay a little bit of interest than to have such a credit account on my report, they are that hurtful to your score. You cannot predict what your life will be like in a year, and as you can see with the gas prices, anything can happen which could force you to default. The reason why there is a crisis right now in America in the housing market is that people, over the past few years, purchased homes that they could barely afford. Take the habit of only making purchases that you can afford comfortably. Living beyond your means catches up to you sooner or later, and it can mean bad news for your credit score.
My last point is that you should check your credit report a few times per year, to make sure that you are not a victim of identity theft. When I worked at that financial company, I witnessed horror stories, and it is extremely hard to fix your credit once that happens. Specifically, check your report a few months prior to applying for a credit account, to make sure that everything is fine with it. Look at your personal and work info to make sure it is accurate, and look at the inquiries made on your account. This is how you can detect if someone is trying to use your identity to open credit accounts. I hope these tips help you in making better decisions when it comes to your credit 🙂