Sunday, September 5, 2010

How to improve your credit

As I mentioned in a previous blog, credit is more important that cash to a real estate investor.  Having poor credit can be rectified.  The first step of course is to know your credit scores.  You can request these online from the two major credit companies (Equifax and TransUnion).  You should check your credit at least once per year and get an updated score.  Make sure the report does not check your credit, that it merely shows your scores.

A few tips to help you out:

Check your report for inaccuracies.  This is very common to have things on your report that are no longer valid.  We all made a mistake with a consumer card in University, but without addressing it, it could keep you out of the investment market longer term.  Know what is on your report and make sure they are valid charges.  I found a car loan on my credit report that was paid a year earlier and erroneously not discharged from my credit report.

•Always pay your bills on time. Although the payment of your utility bills, such as phone, cable and electricity, is not recorded in your credit report, some cell phone companies may report late payments to the credit-reporting agencies, which could affect your score.

Stop digging the hole.  When you feel you are getting over your head, don't apply for more credit and focus on paying off the credit you have.  Start with a simply strategy - take the monthly minimum payment and divide it by the total amount owning.  Pay off the highest number first.  Once it is paid off, re-assign those debt dollars to the next highest debt.

•Try to pay your bills in full by the due date. If you aren't able to do this, pay at least the required minimum amount shown on your monthly credit card statement.

•Try to pay your debts as quickly as possible.

•Don't go over the credit limit on your credit card. Try to keep your balance well below the limit. The higher your balance, the more impact it has on your credit score.  Try to stay below 70% loan to value, meaning if you have a line of credit with $10,000, try to only borrow $7,000.

•Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short period of time, this may have a negative effect on your score. However, your score does not change when you ask for information about your own credit report.  Reduce the number of credit sources you have.

•Make sure you have a credit history. You may have a low score because you do not have a record of owing money and paying it back. You should maintain a minimum of two credit sources. For people starting out, get two credit cards borrow some money and pay it back immediately. This will show a level of responsibility to the credit companies.  You can build a credit history by using a credit card.
For more information on credit, please click here.

1 comment:

  1. 1.Get a Secured Credit Card. The fastest, cheapest and easiest way to establish a credit history is with a secured credit card. Since there’s no risk to the lender because you’ve put up the cash to cover your balance, secured cards are great for new borrowers or people trying to re-establish credit after a bankruptcy. Lenders usually want twice the credit card limit. So if you want a $500 credit limit, you’ll have to ante up $1,000. Once you’ve established your ability to manage the card – anywhere from six months to a year – you can ask for the security requirement to be dropped and your deposit returned.

    2. Get a gas or department store card. Gas or department store credit cards are often easier to get and can be good ways to establish credit. You must pay your bills in full and on time because the interest rates on these cards are often astronomical. But as long as you don’t miss a payment – which you never will, right? – it makes no difference what the interest rate is. Use these cards wisely and they can be a great toe-hold.

    3. Borrow for an RRSP. Borrowing money to contribute to an RRSP is a great way to establish a credit history. While the RRSP cannot officially be used as collateral for the loan, lenders know where to find their money so approvals come more easily and the interest rate won’t be horrendous. Make sure you only borrow as much as you can afford to repay in six months. How much you borrow doesn’t mean much; repaying the loan quickly without a misstep does. Don’t let anyone talk you into more. Once the six months are up, use the amount you were using to repay the loan as your month retirement savings contribution. Now you’re building up your assets, which will be good for your credit history too.

    4. Get a co-signer. While I’m not a big proponent of signing on for other people’s debt, if you can find someone who loves you enough to put their credit history at risk for you, do it. Make sure the loan history is being reported in your name and not the co-signer’s.

    5. Put up collateral. If you have someone a lender can sell to get back his money, you’re more likely to get credit. Collateral comes in all sorts of forms: from the car you’re buying to those GICs you’ve got stashed away, if you have something a lender values, you’re in the money. Of course, getting credit is only the first step to building a credit history. How you use that credit will be the real test.

    1. Pay all your bills on time. Yes, including your cell phone bill, since some cell providers report to the credit bureau. Setting up pre-authorized payments is a great way to ensure payments are made on time.

    2. Avoid applying for credit too often. Since repeated requests for credit may be interpreted as a sign that you’re in trouble and need a way to cover your butt, this will adversely affect your credit score.

    3. Charge regularly and pay off in full. Responsible on-going use of credit will produce a good credit rating. Just having your card sit in your wallet does nothing to add positively to your record.

    4. Don’t over-expose yourself. Having multiple forms of credit with small balances can add up quickly and become unmanageable.

    5. Don’t use credit to pay off credit. Taking cash advances on one card to make payments on another means you’re in over your head. Cut back on your spending, pay off your debt and get back to the business of using credit to keep your record active and healthy, not to spend money you haven’t yet earned.