How Your Cellphone Can Help You Build Credit

Mobile alerts from your credit card issuer can do much more than alert you to possible fraud. You can use that information to help you improve your credit.

First, a word about how credit scores work. The two biggest factors are paying on time(35%) and the amount of credit you use relative to your credit limit (30%).

And mobile alerts can help you with both, by reminding you when your payment is due (you can choose the number of days in advance; some default to five) and when you are approaching your credit limit.

If you are certain there will be enough money in your checking account to cover it, you can automate the payment to be sure you will never be late with a payment. Whether you do this or not, it’s smart to go over your statement carefully, looking for any charges you don’t recognize. Those could suggest fraud and should be investigated. Identity theft experts recommend you check your accounts every day. Checking often will also keep you aware of the amount owed, so the bill won’t come as a shock.

Second, you can set up a mobile alert for spending limits. Under one of my cards, there is an “approaching limit” choice, and it can be customized to any amount you choose. If you have several choices of cards with available credit, you could set this low — at, say, 10% of your credit limit, so that you get an email or text letting you know you’ve reached that. At that point, you could choose to pay what you owe, so that you once again are at 0%, or you could switch to a card that has a lower balance, relative to its limit.

Finally, you can use credit alerts to help you catch credit card fraud faster. You can set up the alerts so that you get an email or text if there is a “card not present” transaction, a foreign transaction, or if there is a charge above an amount you designate as a maximum for a single purchase. While this will not directly benefit your score, it may prevent your score from dropping because of fraudulent transactions.

Not sure what your score is? You can’t monitor it unless you know. Some credit card statements now come with a score, and you can also get two scores for free, updated every 30 days, from Credit.com. You’ll also see personalized “grades” showing how you’re doing on the factors that go into your score. One caution: When looking at your scores, be sure you compare the same score and scale each month to keep track of your progress. Scores fluctuate, and a few points up or down shouldn’t be of great concern; the trend is far more important.

The Change That Could Give Millions of Americans a Better Credit Score

Millions of consumers could be lifted out of subprime status and get better loan terms if credit reports and scores were broadened to consider on-time utility and rent payments, according to a study released Wednesday by Experian.

Experian is advocating for inclusion of non-traditional entries onto consumer credit reports, expanding them beyond loans, credit cards and mortgages. Doing so would allow consumers with “thin” files — those with very few traditional credit accounts — to more easily obtain loans and credit cards.

“By adding on-time alternative payment data to credit report files, millions of consumers could gain access to basic financial services such as loans and credit cards,” Experian said in a statement.

The Experian study suggests it could also give a second chance to consumers who have been flagged as a poor risk by the credit industry.

Experian’s study found that by including on-time utility payments in credit reports, there was nearly a 50% drop in subprime consumers with credit scores, and a corresponding 54% increase in consumers rated “non-prime,” which puts them only one level below prime.

“Since gas and electric services are used by just about every household in the country, including these positive payments in their credit files provides millions of Americans with a way to build their credit history,” said Genevieve Juillard, president of Experian’s Consumer Information Services.

Experian’s study also examined the impact of adding rent payment history to credit files, and found it lifted 20% of consumers out of the subprime category.

Last year, credit reporting agency TransUnion conducted a similar study that offered similar results. It found that 8 in 10 subprime consumers experienced an increase in their credit score after just one month of hypothetical inclusion of rental payments into their credit histories.

“We believe reporting rental payment performance is simply the right thing to do for apartment residents and the apartment rental industry,” said Tim Martin, executive vice president at TransUnion, at the time. “Renters will be able to build positive credit history, gain access to more financial products, and most importantly, help them recover from the housing market crash.

For its study, Experian created a hypothetical, adding 25 months of positive payment history to consumer credit files culled from its database.

It’s unclear what percentage of subprime or nonprime consumers would have such a clean utility or rent payment history — Experian doesn’t have full access to that information — so the real-world impact of adding alternative payment histories might be less that this study suggests. Still, it’s clear that consumers with only a small credit profile, or with a damaged profile, would see improved credit opportunities if they paid their other bills on time and got credit for doing so.

“While an individual’s credit score is important, the thickness of a credit file is also a critical factor in a lender’s decision,” said Chris Magnotti, strategic analytic consultant for Experian. “An increase in the credit file thickness alone, even with the risk segment remaining the same, can yield benefits such as lower credit card interest rates.”

Consumers who want to know more about their credit standing should check their credit regularly – they can get a free annual credit report from each of the three major credit reporting agencies. 

5 Things You Can Finally Do Once Your Credit Improves

Where was your credit in the spring of 2008? For many people it was teetering on the edge of solvency, about to plummet into the deep hole known as the Great Recession. By the end of the following year, 2009, mortgage delinquencies would climb to almost 7%, according to data by TransUnion. Credit card late payments also climbed, according to Federal Reserve data, and would peak at 6.78% in the third quarter of 2009.

If you were among those sucked into the collapsing bubble of the housing market or whose incomes took a beating in the soon-to-be tumultuous job market, your credit probably did not ride out the recession unscathed. Instead, you may have lost your home to a short sale or foreclosure, or were forced to negotiate settlements on some of the credit cards you couldn’t pay back. Maybe you even filed for bankruptcy.

Whatever damage was done, it’s now been seven years since the recession began and consumers (and lenders) are cautiously breathing sighs of relief. Delinquency rates on mortgages and car loans are at “normal” levels. New TransUnion data reveals that the mortgage delinquency rate (the rate of borrowers 60 days or more delinquent on their mortgages) declined for the 12th straight quarter to 3.29% at the end of the fourth quarter 2014.

At the personal level, negative items such as charge-offs due to unpaid credit cards are beginning to “age off” credit reports. That means some of those hardest hit by the downturn may see their credit scores improve over the next couple of years simply because negative information becomes too old to be reported. Time can sometimes be the best credit repair solution.

While the recovery is certainly not complete for everyone, for those who are starting to see their credit scores improve, the question is, “What now?” What can you do once your credit starts to recover? Here are five suggestions.

1. Refinance Your Home — or Buy One

There were three main reasons it became tough to get or refinance a mortgage after the recession: Home values had dropped in many parts of the country, credit and credit score requirements got tighter, and many people had been laid off from their jobs or taken pay cuts.

But the rate of homes underwater is steadily improving (down from a peak of 21% to 16.9% and dropping in the third quarter of 2014, according to Zillow). And in the meantime, its’ become easier to get a mortgage. Plus more people are back to work, albeit some at lower pay.

Taken together, these factors mean that 2015 could be a good year to get or refinance a mortgage. Interest rates are still low and in many parts of the country, homes are still affordable. If you haven’t shopped for a mortgage in the past year or so, now may be a good time.

2. Trade In Your Clunker

If you’ve been trying to eke a few more miles out of your car or truck before it dies, it may be time to consider replacing it. Interest rates on vehicle loans are low on average, and even dealer financing can be very attractive as automakers compete to sell their inventory. That doesn’t mean you should throw caution to the wind and go for the best car you can afford, though. Auto loan terms are getting longer — 67.2 months on average, according to Edmunds.com — and with an average vehicle price just over $32,000, that can mean significant debt for many families. But if you can negotiate a good deal on a car or truck, finance it at a low interest rate for a reasonable period of time (48 months or less is ideal), then keep it in good condition, you can come out ahead.

3. Negotiate a Better Deal on Your Credit Card

Pre-recession, the advice about credit card rates was almost always the same: Don’t be afraid to call your card issuer to ask for a lower rate. “It can’t hurt,” experts would say (myself included). But as more and more cardholders started falling behind on their payments, issuers became more cautious. Some raised cardholders’ interest rates, others cut credit limits — and some did both. Consumers who called to complain about a credit card rate that was too expensive sometimes had their limits slashed or accounts closed, especially if they mentioned that they were experiencing financial difficulties.

But most people are paying their credit cards on time these days, and issuers are back to courting cardholders and making deals, especially for those who carry balances or who charge large amounts each month. So if the cards you are carrying balances on have high rates but your credit scores have improved, don’t be afraid to see if your issuer can offer you a better deal. If not, a balance transfer may be another option for cutting your interest rates 

4. Consolidate Your Debt

If you are still paying off balances on credit cards you ran up several years ago, a consolidation loan may help you finally get those paid off. With a personal debt consolidation loan, you can often get a loan with a fixed interest rate and specific repayment period. Consolidating this way gets you off the minimum-payment treadmill and allows you to work toward a debt-free date in the not-so-distant future. And consolidation loans have become much more widely available post-recession, thanks in large part to the peer-to-peer lenders that offer them.

Home equity loans are also becoming more popular again thanks to rising home values, but all things being equal, an unsecured loan (like a personal loan) is often a safer bet in the long run when compared to a loan against your home.

5. Get Your Secured Card Deposit Back

Did you open a secured credit card to rebuild your credit after it went south? If so, it may be time to move on to an unsecured card and get your deposit back. A few secured cards offer a “graduation” feature where you can get your secured account upgraded to an unsecured one. But in many cases, you will need to get a new credit card then close out the old one.

While keeping accounts open as long as possible is often a good strategy as far as your credit scores are concerned, there are times when closing them make sense, and this is one of them. As long as you haven’t defaulted on payments on your secured card, you should be able to close your account and have your deposit returned.

Remember, with all these options, it takes good credit to qualify for the lowest interest rates and best deals. So before you start shopping, review your credit. Get your free annual credit reports, and get an idea of how lenders view your information by checking your credit scores.

The Most Misunderstood Credit Score Factor

Despite your best intentions, there may be times when you just have to carry a balance on your credit cards. When you do, how do you protect your credit score? Reader Eddie Vidmar writes:

At some point within the next few months, I am going to have a rather steep expense of putting in some fencing. That is going to cost me to the point where I may run up my credit cards. I will assume that by using a high percentage of my credit, as I spend 90 days zeroing all the cards out again, I will see a slight dip in my credit score. Does logic say that after that 90 days when I zero them all out I should see it go right back to where it was, or does a brief period of “He used 60% of his credit” have an effect that lasts longer that “He is now back to 0% of credit used”?

He went on to explain that he plans to use about $1,000 of his $3,000 in available credit. That will put him right at about the 30% range for “debt usage” (also known as “utilization.”) FICO says that consumers with the best credit scores tend to use less than 10% of their available credit. While there’s no specific percentage you must stay below to have excellent credit, it is best to try to keep balances below 20% to 25% of your credit limits if possible. Higher than that, and your credit scores may suffer.

Planning Ahead

Vidmar’s been working on his credit scores and over the past year he’s increased them by roughly 100 points. He monitors his credit scores and tries to avoid carrying a balance. “I generally keep my credit usage to 10-12% and pay the bills down to 0% every month,” he wrote in an email. So he’s smart to plan ahead for what may happen.
The good news for anyone in this situation is that high utilization can be a temporary problem. Unlike your payment history, which takes into account every late payment on your credit report — past or present — this factor is based on current information. In other words, whatever the balance and credit limits are at the time the your credit report information is requested, that’s what will be used to calculate the debt usage ratio.
(That may change, though. Some credit reports are starting to report cardholder’s previous balances and how much they paid in comparison to their credit limits in the past, but that information is not widely used in credit scoring models today.)

Minimizing Credit Damage

If debt usage is bringing down your credit scores, you have a few options:

1. Pay down balances. As soon as balances on your credit reports are updated (most credit card issuers provide updates monthly to the credit reporting agencies), that new information will be used to calculate scores. Paying down debt can help remedy this factor.
2. Use a personal loan to consolidate high credit card balances. This tactic may help raise your credit scores since personal loans are reported as “installment” loans on credit reports, and the debt usage ratio is not a factor for those loans the way it is for credit cards (which are considered “revolving” accounts).
3. Spread out balances. It may be possible to avoid high utilization by either splitting up charges among different cards or by transferring part of the balance to another card with a low balance and/or more available credit.
4. Get help. If you’ve been struggling to pay down credit card debt and your cards are maxed out, it’s not a bad idea to talk with a reputable credit counseling agency to see if they can help you put together a plan to get out of debt.

Wanting to make sure he’s on the right track to rebuild his credit, Vidmar asked another question related to debt usage, “Some offer the theory that taking a small, manageable balance forward every month actually helps your score. I tend to think that it does not help your score.” He’s correct. It’s not necessary to carry a balance to build or maintain strong credit.
Debt usage is often in flux, because balances tend to change from month to month. Reviewing your limits and balances before you make a large purchase, as well as paying attention to your credit rating, can help you decide the best strategy going forward.

HOMEBUYER SEMINAR

Why Isn’t My Credit Score Going Up?

Sometimes getting ahead feels more like a herd of turtles than a rabbit. That’s especially true when it comes to credit scores.
Check out this reader question, and see if you can relate.

Hi! I have a question for you. I’ve been working on improving my credit score for about three years now, but I cannot seem to raise it above 640. I have a few credit cards, with decent limits, not as high as I would like, and low utilization, a car loan, and nothing in collections for a few years. My credit reports say that low credit limits and time limits are hurting me, as well as the collection from a few years back (settled). What can I do? — CZ

Here’s your answer, CZ!
There are all kinds of things that can impact a credit score.

Why Is My Credit Score So Low?

Several years ago, FICO, creator of the most commonly used credit score, revealed how certain actions affect credit scores. Here’s a list of some of the most common score busters.

• 30-day late payment — 60-110 points.
• Debt settlement — 45-125 points.
• Foreclosure — 85-160 points.
• Bankruptcy — 130-240 points.
• Maxed-out card — 10-45 points.

The higher end of the ranges above would generally apply to those with the highest scores (780-plus) and the lower end to those with lowest scores (below 680). Keep in mind that a perfect FICO score is 850, and to get the best possible interest rates, depending on the lender, you’ll need 730 to 760.

Why Does It Matter?

CZ is right to be concerned about her credit score. Bad scores mean less access to credit and higher interest rates when an application is approved. Less access to credit can lead to lost opportunity, and higher rates can cost a ton of extra money.
Consider the mother of all debt: a mortgage. Say you’re borrowing $200,000 on a 30-year fixed-rate mortgage. Show up at the lender’s office with a 620 to 639 credit score, and at today’s rates you’ll pay 4.954%. If you make minimum payments, your total interest bill over 30 years will be $184,490.
But if you waltz in with a 760 or higher score, you’ll pay only 3.365%, and your total interest bill declines to $117,911.
So over the life of this loan, the lousy score will cost a borrower an extra $66,579. That’s enough to finance your own business, put a kid through college, or maybe retire a year or more earlier.
(By the way, the information above came from a calculator from FICO. Check it out for yourself.)

The Opportunity Cost of Bad Credit

Another even more dramatic way of looking at the same thing is to consider opportunity cost, a term describing how money you spend today can cost you in terms of the opportunity to have more money tomorrow.
Because of our low score, the higher interest rate on our $200,000 loan means a monthly payment of about $1,094 a month versus about $883 a month for a borrower with a higher score. So the person with the higher score has the opportunity to save about an extra $200 per month. If they use that opportunity wisely and invest their $200 monthly for 30 years and earn 8 percent on it, possible in the stock market, they’ll end up with an extra $298,000. That’s enough money to change your life.
In short, bad credit is expensive. If more people realized that, maybe we’d have fewer lousy credit scores floating around out there. According to the Corporation for Enterprise Development, in the third quarter of 2013 more than half of Americans had subprime credit, which generally means a FICO credit score of less than 640.

What Should CZ Do?

Now let’s (finally) get back to CZ’s question: “My credit reports say that low credit limits and time limits are hurting me, as well as the collection from a few years back (settled). What can I do?”
I doubt that low credit limits are hurting CZ. But if by “time limits” she means not enough time has gone by, I’m on board. I suspect that this was a seriously low credit score at one point. Otherwise, three years of on-time bill payments should have lifted her score over 640 by now.
She’s done what she can: Perhaps she’s gotten new credit. She has various types of credit, revolving (credit cards) and installment (car loan), and is keeping her utilization ratio low (not using all her available credit). She’s also hopefully paying her bills consistently and promptly.
What’s left? Time. Like many mistakes in life, when it comes to credit, it can take days to screw up and years to recover. Also like other mistakes, however, as time marches on, they have less influence. So if CZ has been doing everything right for three years, it shouldn’t be much longer before she sees significant improvement in her score.

How Much Will One Late Payment Hurt Your Credit Scores?

You open your credit card statement and discover you forgot to make last month’s payment. Or you get a call from a collection agency about a medical bill you didn’t realize hadn’t been paid. Or you check your credit reports and discover a late payment is marring your otherwise perfect payment history.
How bad is it? How much does a single late payment affect your credit scores?
Of course, as with so many things related to credit scores, the answer is, “It depends.” But the irony is, the better your credit, the more you may feel the sting.

Hope for the Best

If you’re lucky, the lender won’t report that you were late. “The first thing to note is that most lenders do not report missed payments until the account is 30+ days past due,” says Anthony Sprauve, director of public relations for MyFico.com. “Suppose a given credit card payment is due on May 15^th (and) the payment is made on May 25^th. Technically the payment is late, and fees and interest charges may apply. But in most cases, this late payment would not be reported by the creditor to the credit reporting agencies (CRAs).”
Or it’s possible your lender may overlook for the transgression. Steve Ely, president of eCredable.com, adds: “The larger creditors (like credit card companies) usually have sophisticated analytic models working behind the scenes that take into account your history of payments. If you’ve been paying on time for a long time, they’re likely to forgive your one late payment, and let it slide.”

But Brace for the Worst

What if you don’t luck out and the late payment is reported? There are three questions that will help you understand the possible impact, according to Barry Paperno, community director for Credit.com:

1. How long ago did the most recent late payment occur?
2. How severe were any late payments (30 days, 60 days, charge off, etc.)?
3. How many accounts on the credit report have had late payments?

“Of these three questions, the one typically having the most impact on your credit score is the first; recency,” he says. “To illustrate, if a single late payment occurred a few years ago and all payments on all accounts have been made on time since, that single late payment will have little negative impact on your score. On the other hand, according to a study conducted by FICO on credit scoring impacts, a recent late payment can cause as much as a 90-110 point drop on a FICO score of 780 or higher.”
“And while any negative score impact from a late payment lessens over time, this information will remain on your credit report for seven years and can be expected to continue to impact your score, at least to some degree, for much of that time,” he adds.
Sprauve also details some of the factors that go into determining how much a late payment will hurt your scores:

• The impact to the FICO score resulting from a new delinquency hitting the credit file can vary significantly depending upon the individual consumer’s circumstances.
• Other history of account delinquencies (on this account or other accounts), or collection references, or adverse legal items on the credit report
• Balance outstanding on the delinquent account
• Number of other accounts on the file which are currently paid as agreed
• Length of credit history

The bottom line? One slip up and your credit score may take a dive, especially if you have otherwise stellar credit.

‘The old analogy of ‘the bigger they are, the harder they fall’ applies to credit scores, too,” warns Ely. “If you have a really high FICO Score, you’ll take a bigger hit for a late payment than someone with a lower FICO Score.”

While the best defense is to be meticulous about paying your bills by the due date, if you do mess up, see if you can’t persuade the lender or collector to remove the blemish from your reports. While they may balk at first, you may be able to get them to change their mind if you have a good explanation as to why it happened — and if you can convince them it won’t happen again.

VALENTINES DAY SPECIAL

Does My Age Help My Credit Score?

Age and credit have a somewhat complicated relationship. Like it often is with personal finance, straightforward questions don’t always have simple answers.
Does your age affect your credit score? In the most literal sense, no: Your date of birth isn’t factored into your credit score. Still, if you’re older, you have a better chance at getting one of the highest credit scores than someone in their 20s, because you’ve had more time to establish a strong credit history. At the same time, it’s still possible to have an excellent credit score before you’re 25.

How Does Age Factor Into Credit?

The average age of your credit accounts is one of the five major factors determining your credit score. Say you took out a student loan and opened a credit card at age 18, and they are your only credit accounts. Ten years later, when you’re 28 and those accounts are still open, you’re doing very well in that category of your credit history. If your best friend of the same age has no loans and opened her first credit card when she graduated college at age 22, her oldest credit account is only six years old, which isn’t great as far as a credit history goes.

How Do I Improve My Credit Age?

Having a 10- or 20-year-old account will help your credit score, but the more newer accounts you have, the lower your average credit age will be. If you’re focusing on improving your credit age, try to minimize the number of new accounts you open, as they bring down your average. Opening new accounts also results in a hard inquiry on your credit report, which will slightly hurt your credit score in the short term.
As it is with all aspects of your credit score, you need to exercise patience as you work to develop a long credit history — after all, you can’t do anything but wait for an account to get older. Tradelines can help to improve your credit score by adding credit information with a positive history.

While you’re waiting for the average age of your credit accounts to rise, focus on making loan payments on time and keeping your debt levels low, because those behaviors have the greatest impact on your credit score

4 Ways to Raise Your Credit Score in 2015

1. Payoff past due accounts.

The bulk of your credit score – about 35 percent – comes from your payment history. The more often you make payments on time, the better your score will be.

So start by checking your credit report for past due accounts. If you have several past due accounts, it's time to triage.

Accounts that are 90 days late will have a bigger negative impact on your score than those that are 60 or 30 days late. So pay off the most past-due accounts first, and gradually catch up on all your payments.

2. Ask for good faith adjustments.

When you look at your credit report you may see just one or two late payments. Maybe these payments were late because of an oversight or because of a one-time financial problem that has since been resolved.

In this situation, you might get an automatic boost to your credit score by asking for a "good faith adjustment." Call or write to the creditor, and ask for a courtesy adjustment. If you've been a good customer and only have one or two late payments on your account, many creditors will remove the late payment from your credit report.

3. Deal with collection accounts, charge-offs and liens.

Accounts that have been charged off or sent to collections have a negative impact on your credit score, and you need to be careful how you deal with them.

Paying charge-offs or liens that are older than 24 months won't boost your credit score. Address charge-off accounts that are less than 24 months old first, then pay the others when you have the funds to do so.

Pay off collections accounts as well, but be aware that paying off collections accounts can, at first, cause your credit score to drop. That's because when you make a payment, the last activity on the account becomes more recent, making it weigh more negatively in your credit file.

The best way to avoid this problem is to ask the collector to erase the account from your credit file when you pay it off. Many collections agencies will delete reporting when you've paid off the account. If the agency agrees to this, be sure to ask for a letter stating that the agency agreed to delete the account upon receipt of your payment.

4. Improve your debt-to-credit ratio.

Another factor used to calculate your credit score is amounts owed. Amounts owed isn't about the actual dollar amount you owe but your debt-to-credit ratio – how much money you owe versus how much credit you have available.

There are several ways to improve your debt-to-credit ratio, which is probably the fastest way to improve your credit score. Here are a few to try:

• Ask for a credit increase. This improves your debt-to-credit ratio without paying an extra dime on your outstanding debt.

• Move credit card balances. Keep your debt at or below 30 percent of your credit limit on each credit card. One way to do this is to simply move balances between cards, even if it means opening a new card. (Plus, you might be able to take advantage of balance transfer promotions.)

• Pay down revolving debt first. Your credit score will reward you somewhat for paying down installment loans, but you'll get the most bang for your buck when you pay down revolving debt like credit cards and lines of credit.

• Transfer debt to a personal installment loan. Consolidate all your credit card debt under a personal installment loan.