Building Your Credit
As a Nevada REALTOR®, I often talk with people who want to buy a home. Many times the buyer is worried about their credit. Sometimes this is justifiable.
When people want to raise their credit scores almost invariably they only talk about removing the negative items from their scores.
Yet, they never think about improving their credit by adding new good items to their credit report.
Let’s go into more details on that by first looking at the actual ways credit scores are determined.
Removing Bad Tradelines
Let’s begin by talking about those bad tradelines or other things which negatively affects your credit.
You can read more about how your credit is calculated by going to our previous article.
The easiest ones to challenge would be to go after recent inquiries that were made against your credit. There two types of inquiries. One is called a hard inquiry and the other is a soft inquiry.
A “soft” inquiry is one that you do yourself. This is when you pull your own credit. These do not usually affect your score. You will do a soft inquiry when you want to get your annual free credit report.
A “hard” inquiry is when someone else pulls your credit. This is when you are looking to get a new line of credit. This can be a Visa or MasterCard pull. Or it can be one that you pull because you want a department store credit card (e.g., Macy’s, Victoria Secret, Wal-Mart, etc.)
There are many companies out there that say they can get bad information off of your account and I would say to research those companies before using them. Some can be expensive.
Updating Your Personal Info
One technique I learned many years ago is that you will want to update each repository with your correct info. This is particularly true if you are female.
The reason I pick on women in this case because it is American tradition for the woman to adopt the man’s last name when she gets married. If you only change your name on some accounts then the repository is going to have two names for her and that will cause her scores to go down.
I am a big speaker on perspectives and that is part of a different business that I am involved with altogether. You can learn more by going to my speaking and coaching site.
One thing you must be aware of is that you need to look at things from multiple perspectives. In the case of credit scores, you must look at it from a binary computer way of thinking.
If you have a social security number which matches Mary Jones and Mary Miller (her married name) this is seen as potentially two people. Also, if she used her middle initial on her Victoria Secret account before marriage then there is a third identity of Mary F. Jones.
The same is true for her address. If she lives at 123 Main Ave. and 123 Main Av. (no “e”) this is seen by a computer as two different addresses. You and I may say that is obvious but that is because we are using rational logic and not binary “1” and “0”.
I have seen people’s scores go up 15 or more points just because they went and changed all of their names, addresses, and other pertinent information on all accounts to just one value. And this includes the DMV. Be consistent everywhere.
If you were to look at my accounts they all say “Kevin A Dunlap”. If you looked at my driver’s license it says “Kevin A Dunlap”. Your identity must be consistent on everything and that is to the letter.
Establishing New Lines of Credit
Taking on new lines of credit will improve your scores over time. This assumes you are using them responsibly. I have a previous article that talks more about that.
Be aware that taking on new lines of credit will actually damage your scores in the short-term though. This is why?
First, a new line of credit will check your credit scores. This is a new inquiry and could knock them down 2 – 10 points.
Second, you have a new line of credit that has no history. This was covered in my Understanding Credit article.
The good thing is that if you are using the new credit responsibly then over the course of 3 to 6 months of good payment history then your scores will begin to rise. And that is the point of the new lines of credit.
Credit Union Trick
I found out about this trick a few years ago. I tell it to anyone who wants to buy a home with a lease option or seller financing.
You can use this trick too if you have time before you are going to make a purchase.
It goes like this. You will need to be in possession of $1,000. This can be borrowed or you have it already in your account.
I did this technique with America First Credit Union, twice.
You call a bank to see if they can do this or go to a credit union near you. Banks often require having at least two other bank accounts so I tend to stay away from them utilizing a credit union instead.
This is the technique. Do this verbatim and even let the credit union associate know what you are doing.
This is a perfect way not only to build credit but also to establish new credit. This would be great for the teenager turning 18 or the adult just getting their citizenship.
Talk to the associate and open a new secured savings account. Deposit the $1000 into that account where you will not be able to touch it. The money is secured.
The next step is to ask the associate for a $1000 installment loan with a payback period of 18 or 24 months (24 is better) using the secured savings account as collateral. Thus, you get the $1000 back in hand. This may take a day to actually get approved for the loan so be okay with this little waiting period.
When you go back to the bank to get the $1000 cash talk to the same associate. Ask him how much interest are you going to be paying. The interest rate I have seen is 3% over what they are giving a normal savings account. Expect a 3.1% interest rate. Using a simple mortgage calculator the total amount of interest paid is $62.00 over the course of a 2-year loan.
Then you add $72 (yes that is $62 + $10) to the secured savings account. That part will not be secured.
Then you tell the associate you want the secured savings account to make your monthly payment. That way you can never be late.
One word of caution though. Make sure your payment date is prior to being late. And a second note is to make sure your payment is on or before the 28th of the month. The first time I did this mine was on the 29th. One February came along and it was noted as possibly late since there was no Feb. 29 that year. They corrected it for the 25th and it was never an issue again.
The reason you set up the automatic payments is that you don’t want to ever be late, even accidentally. And, you already prepaid the interest for the duration of the loan!
The reason for the additional $10 is what I call a “buffer”. If a payment overlap occurs or anything like that you have that little extra in there for that.
Each month you will receive a one-sheet statement. On one side it shows the loan amount withstanding and the amount still in the savings account. The savings account should always be higher than the loan amount. Your only task on a monthly basis is to open that letter and look at those two numbers. That is it.
What It Does to Your Score
When you first do this it will be a negative event on your credit score. And expect this for the first few months.
As stated in the article on Understanding Your Credit there will be a new inquiry on your credit. Second, this is a new loan with no payment history. Both of these are negative events. However, over time, 6 or more months, this will show as a good remark for the on-time payments. Your scores could go up fairly significantly just so as long as you are not defaulting on your other accounts.