I’ve had bad credit for the last fifteen years or so. The last three years I’ve been working at improving it by paying off debts, being timely with utility payments and keeping my bank accounts in the black.
Yesterday, I got approved for a credit card with a small ($500) limit. My question is how do I best use it to further improve my credit rating? Small purchases with immediate payments? Keep a running balance with more than minimum payments?
Do tell.
I have to say it felt terrific to reach that point of breaking out of the Catch-22 of credit ratings: you need good credit to improve your credit rating…
The only way to have a good credit rating is to stay in debt. In other words, don’t pay it off in full, but don’t pay it late.
Watch the documentary Maxed Out if you can. It airs on Showtime on a somewhat regular basis. One of the things that made me go :eek: is that your FICO score has absolutely NOTHING to do with your income.
My mortgage guy told me to use it sparingly, and just make sure to get the payment in on time. I’ve heard both that you need to keep a running balance, and that you need to pay it off every month. I suspect that as long as your payment is timely, either one is okay.
I have poor credit too, and recently (for other reasons) my mom added my name to her credit card account. She has great credit, and I was amazed to see my credit score jump almost 100 points immediately. I knew that this used to be a common way to trick your score up, but I thought they’d put a stop to it. Something to consider, anyway.
Congratulations–you’re making progress. It’s a long road, but it’ll be worth it.
Best,
karol
One other thing to do is challange EVERYTHING on your report. The creditors have to back this up or it gets removed. Often your creditors will lose facts and you can get it taken off. It does happen so it does pay.
Credit is about your ability to repay a loan. People who charge then pay it all off have not shown they can manage money really.
If you’ve had bad credit for 15 years something is a miss. Bad stuff (except a bankruptcy) stays seven years, so try living on cash to clear it up.
And really unless you have a lot assets consider filing for bankruptcy. I mean if your credit is bad how much WORSE will it be and you won’t have to repay your debts (maybe unless you have a house and such to protect)
There should be no stigma, look at all the big companies that file bankruptcy after bankruptcy in order to stay competitive.
I did it with the credit card and then with a “real” loan with monthly payments. My once-shitty credit is now GOLDEN. I am a homeowner and my credit is considered Excellent. Good luck and happy credit rating!!
I am not a credit expert, but my score is over 800. I use my credit card for almost everything except my daily meals and entertainment. I pay it off every month.
Good luck and congratulations on your success so far!
Really? My understanding is that a good payment history is part of the equation, and while credit companies don’t like people who pay off their debts each month, you aren’t hurt by doing so (at least, to the point where you’re financially benefiting considering paying the interest on your card).
My understanding is that the idea is to slowly improve your credit by getting higher credit limits (decreasing utilization, and showing you can handle greater responsibility) while simultaneously either disputing old debts or waiting for them to roll over the 7 year deadline and be removed (making sure they’re removed).
They can help with list of cards that you’re likely to get approved for at various stages of repair (so you don’t get a lot of ‘inquiries’ on your credit, which temporarily lowers your score), as well as the nuts and bolts of dealing with debt dispute and validation. Validation of the debt means that the company must prove the debt is real and correct. This is required of them by law, and it’s very possible to get debts removed from your credit rating this way - collection agencies in particular try to play fast and loose with the law, and you can actually get money from them for violations. They can also help you with settlements and how you want to do them to best benefit your credit. For example, if it’s a small debt but it’s gone to collections, you might be able to negotiate a “pay for remove” – you agree to pay the full balance (or a higher amount than they’d normally settle for), and they agree to take it off your credit so it’s not reported as late or settled. Always get these in writing, of course.
Nobody knows the whole story of how the credit score formulas work except for the people that build them. Credit score dorks do experiments to figure them out put you don’t need to worry about that. It is true that credit scores don’t depend on your income or the volume of money going through you accounts.
The main strategy should be to keep it very basic. Use your new card some but certainly don’t put so much on it that you get yourself into problems paying it back right away. Just putting a little on it every month and then paying it off right away is the best thing you can do. It may only be $20 a month you charge but that is good enough for your purposes. Don’t be tempted to use it for anything else besides this purpose for quite a while.
Don’t go over the limit, and use the card regularly. Run it up to near the limit and then pay it down. Get the limit raised when you get time under your belt with the credit card company.
Of course, be on time.
Finally, do not close it. If you stop using it for a better credit card, keep it open.
These are the things you can do with that one card that will definitely boost your score.
Once you have a proven track record of responsible use (as described above), whe you decide it time for a higher limit, NEGOTIATE… do your research… find out who has a better introductory rate and quote that rate when you ask for a higher limit…
ie: " I would like to discuss raising my limit and lowering my rate. I would like to go from $500 to (say) $1500, but I notice that Card-C0 is offering a rate 3% lower than your’s. Can you meet or beat that?"
You’d be surprised how fast they come around, as long as you have given them a track record that shows you deserve the cosideration.
We never carry a balance on our credit cards. However, we have bank loan debt (under $10K) and a mortgage (2 more payments…wooHOO). Not sure if the bank loans change things, but we’ve had the same credit card for 15 years, so I don’t think they’re upset with us for paying it off monthly.
I don’t think the first part is true at all, and this seems to be spectacularly bad advice that basically guarantees you will be paying finance charges when you don’t have to. I think a part of the equation is having a good amount of credit available to you but not using a significant amount of it. So if you had a $20000 overall credit limit but were only charging your day to day expenses and paying it off in full every month you would be in good shape. If you only have a $500 limit I’d use the card every month for a few small purchases and pay it back in full every month, and gradually get the limit higher.
Regarding the income, thank god for that. I think these companies already have too much of my personal information. People providing you loans frequently ask for this information anyway, so it isn’t like it isn’t typically factored into the equation.
I mentioned this in a related post a while back. I always pay off my credit cards every month, and both Amex and Mastercard periodically increase my credit limit without being asked which leads me to believe that they must think my credit rating is good if they are willing to keep doing that. So, I’m not convinced that paying off less than your entire balance every month is necessary in order to improve your rating.
Another thing about the income is that it really wouldn’t make sense to include it in the FICO score, as different lending institutions would use this information differently. A FICO score should in theory be a statistical number representing your likelihood to be a deadbeat. Having a good score would be relevant to any lending company, but the credit card company giving you a limit of $500 should be happy with a high FICO score and a lower income than the bank giving you a mortgage for $500,000, which would require a larger income. It is best that the individual companies make these decisions, rather then creating a FICO score that is only relevant to some lenders.
Exactly. I do this as well, and happily have my limits extended all the time. There is a difference between your FICO score, which should represent the statistical likelihood of you paying back your debts, and your profitability as a customer. I doubt I am a very good customer for the credit card company: I never pay a finance charge. I am sure they earn transaction fees from the merchants but I have a hard time seeing how that balances out against the hundreds of dollars of gift cards I have redeemed through credit card points.
Dave Ramsey is famous for saying that the FICO score is nothing more than an “I Love Debt” score. The more you use debt, the higher your score goes. People who pay cash for items, and who generally act responsible with their money, often have very low, or unrated, FICO scores. I think that it would be beneficial to society as a whole if more people refused to worry about it, and just made smart financial decisions.
I agree with this in general, and typically have no need to be concerned about the FICO score.
That being said, I practically never use cash and charge everything simply for the convenience (not to mention the hundreds of dollars of Amazon gift cards I’ve cashed in). This doesn’t cost me a cent as I pay in full every month.
The burden is on the data furnisher to maintain proper records and respond to disputes. If they aren’t doing those two things, the data should never have been reported in the first place, because the inherent accuracy is in question. If there is no chance of having negative information removed (even though it might be accurate), then the data furnisher has even less motivation to report accurate data and maintain reasonable methods to ensure it is accurate and respond to disputes.
The FCRA (Fair Credit Reportng Act) gives you the right to dispute anything on your report. If it is accurate and the data furnisher is on the ball, then it will remain on file.