Building Good Credit Takes Time, Patience and Restraint
Posted on December 7, 2007
My writing partner, Roger Dawson, and I co-author the Weekend Millionaire book series published by Mc-Graw-Hill. As part of an effort to educate our readers about real estate investing, wealth building and negotiating, we host a FREE live online chat each Monday evening at 8:00 PM Eastern time on our website at www.weekendmillionaire.com/chat. These chats are open to anyone who would like to ask us questions and get immediate answers. Occasionally, we invite special guest experts to assist us in answering questions that go beyond our level of expertise.
On November 19, 2007, Maxine Sweet, Vice President, Public Education and Rod Griffin, Senior Manager, Public Education for the credit reporting company Experian North America were our guest experts. In a rapid fire question and answer session, they provided us with a vast amount of information. I would like to share a few points they made that I thought would help you gain a better understanding of some items that can affect your credit rating.
First, credit reports don’t include income reporting, so the amount you make is irrelevant for credit scoring. What is considered is installment debt and a very important risk factor is the ratio of the balance you owe in relation to your credit limit on revolving accounts. Many people think that it helps if you close credit accounts you aren’t using, but the advice from scoring modelers today is to leave the accounts open. If you close accounts you aren’t using, you lose the available credit limit which lowers your balance-to-limit ratio, making you look like a greater credit risk even though you are not.
It is strongly recommended that you check your credit regularly to make sure the records are accurate. You can obtain a free credit report from each of the national credit reporting companies once a year at www.annualcreditreport.com. There are three primary credit reporting companies, Experian, Equifax and TransUnion. Their contact information is as follows: Experian; www.experian.com or 888-397-3742. Equifax; www.equifax.com or 800-685-1111. TransUnion; www.tuc.com or 800-916-8800. Each company calculates its own credit scores, which are based on information the company keeps on file. Your credit score will change each time creditors report new information.
One questioner asked if it would improve your credit score if you carried a small balance on your credit cards rather than paying them in full each month. About the only thing this will do is result in you being charged interest on all your purchases each month. What is reported to the credit bureaus is the amount you owed on the last statement. The balance is never reported as zero unless you have absolutely no charges in a month. Whether you pay the balance in full or only make the minimum payment, it will be reported that you paid as agreed. Your report will show balance histories for several months, so someone checking your credit will get a good idea of whether you pay in full or just make payments each month.
To improve your credit rating, you want to keep your balances as low as possible. There is no “ideal percentage” of your total credit limit that you should keep your balances below, but in most cases anything below 35% would be considered good. Also, keep in mind that it’s not how much credit you have, but rather how you manage it over time. For example, longer users usually are able to build higher scores.
One point that I found interesting was the way credit inquires impact credit scores. If you are applying for credit at several places within a short period of time, these inquiries will show up on your report. Too many of them can negatively affect your credit score. However, some inquiries do not affect your credit score. When your report is pulled as part of annual credit reviews, inquiries by insurance companies, employers or by companies that want to make pre-approved credit offers, these have no effect and will only show up on a report ordered by you personally.
Here’s a tip! Revolving credit that is managed well is seen as very positive by credit reporting companies. This type credit, which to most people, is primarily associated with credit cards, is more closely scrutinized because it involves more freedom of use than does installment debts like car and house payments. You decide when and how much of it you will use and how much you will repay each month. The longer satisfactory history you have of using without abusing this type credit, the better you credit scores will become. By the same token, even a short history of abusing revolving credit can take a long time to repair.
Access to credit is a wonderful thing, but using it to live beyond your means is a recipe for disaster. Using credit to pay for things that don’t produce income means you are suffering from a disease I’ve previously identified as STIT. That’s Spending Tomorrow’s Income Today. Before you do it, think long and hard about all of the tomorrow’s you will have to work to pay for today’s excesses. Think about what you will have to sacrifice because your future paychecks will be reduced by the amount of the payments you will have to make on the debt.
If you would like to read the entire transcript of the chat with Maxine Sweet and Rod Griffin, you can do so for FREE at www.weekendmillionaire.com.
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