Building Credit Basics
Opening and maintaining new accounts that report to the credit bureaus is the key to building a solid credit rating. There are many different types of accounts that you can be approved for even if you have a poor credit rating. Typically, you will pay a higher interest rate, higher fees or may have to secure the account with collateral such as money or assets in order to acquire accounts if your credit is less than perfect. You must understand that your credit history accounts for about 35% of your credit scores; therefore you must open new accounts and pay the price if they ever want to increase your scores. If you have sub-par credit, slow credit or no credit you may want to consider opening accounts that do not require established credit for approval.
The golden-age of piggybacking isn’t completely over! One of the best-kept secrets to instantly improve credit scores just stopped working as of February 2008 when Fair Isaac & Company better known as F.I.C.O. made significant changes to its credit scoring model. For many years people were able to benefit from other peoples credit by simply being added as an authorized user. The primary’s credit card account would suddenly appear on the authorized user’s credit reports and the scores would be recalculated with this aged positive account. This technique was referred to as piggy-backing. Creditors and lenders were up in arms over this unfair advantage and quickly began protesting it with F.I.C.O. They protested this unfair advantage because it meant that they were going to fund loans and credit with credit scores that were not accurate and in the long run they were going to lose money. It is obvious that this is true because the extremely high rate of foreclosures and bankruptcies in recent years. Some people believe that this horrendous mortgage and bankruptcy crisis is due to unfair advantages like piggy-backing because people have obtained credit that otherwise could not have been obtained and are now defaulting.
Not only has the sub-prime meltdown made almost all lenders nervous and broke, Fair Isaac & Company have announced major changes to its formula. As a result, some actions that may not have hurt scores much in the past could cause their scores to go down or drop substantially, while other behaviors could help them boost their scores more than it used to. If you want some examples, take this for instance:
Keeping balances high on credit cards could hurt more. Actively using credit accounts is more important. Having a mix of different credit accounts (revolving, installment, auto or mortgage) will help more because the new formula has a greater impact on credit scores simply because the clients ability to handle different types of credit. Applying for new credit accounts may not affect scores as much.
Some things about the latest revision to the score, referred to as F.I.C.O. 08, will stay the same. F.I.C.O. 08 will have the same 300 to 850 range as the classic F.I.C.O. score in widespread use today, with higher scores indicating lower risk of default will lower interest rates, cheaper insurance premiums, better deals on mobile phones and lower utility deposits, to name just a few of the ways credit scores are used. F.I.C.O. says most consumers will see a slight increase in their F.I.C.O. 08 scores compared with their classic F.I.C.O numbers, but others will see a drop. These changes, specifically being added as an authorized user no longer affect your score; so if your clients have accounts which have them listed as an authorized user on, these accounts will be completely moot and will not be calculated into their credit score. There was a brisk and very brief business which sold a place on someone else’s credit card as an authorized user. If your clients were one of these people who paid to benefit from someone else’s credit, it no longer works.
There is however; a piggyback technique that does work and very few people know about it. The only way you can piggyback now is to get added as a “Joint” account holder, which definitely has its disadvantages but it can season and increase credit scores and that is what really matters.
How “Piggybacking Works”
Find someone you can trust. This person must have a credit card account with a major bank in good standing with a low or preferably no balance and be willing to add you as a “Joint” account holder. Contact the credit card company and request to be added as “Joint” account holder. Make sure you monitor your credit reports to make sure it gets reported to the credit reporting agencies.
That’s all you need to do and your done. Provided you did everything correctly; this account will be added and should show up on your credit reports with one or more of the major credit reporting agencies Equifax, Trans-Union and Experian within 60 days or less. The next time a lender pulls the credit report for a credit application; F.I.C.O. will recalculate all (3) credit scores and include the joint account as if it was yours. The entire payment history will appear and get calculated into the new F.I.C.O. scores.
Please remember you can also piggyback new accounts by applying jointly but the secret about piggybacking is the fact that F.I.C.O.’s scoring model will take into consideration the years of previous payment history which took place before they were added to the account. For example, if you piggyback an account that was opened in 1990 they just added over 18 years of payment history that gets calculated into the scores. If you open a new account like a car loan, credit card, mortgage or installment loan by applying jointly; that is a new account which will actually affect the scores negatively for at least awhile. Of course as time progresses, payments are made and the account ages; the account will begin to affect the credit in a more positive manner.
The disadvantages to piggybacking as a joint account holder are as follows:
You are equally responsible for the account. You cannot remove his/her name from the account until it is paid and closed. If the primary defaults the joint account holder is responsible for the balance. If the primary is late or defaults, it will affect your credit.
Make sure that the primary account holder is a responsible person and intends on paying the on time and keeping the balance low otherwise there is a good possibility that you will end up with problems. It’s almost as if the primary is cosigning on a loan for you but the primary can also get you in trouble so be very careful and use it for your benefit, not to their demise.
Go to any bank or credit union, preferably the bank you already have a checking and/or savings account with. Banks operate differently. The most common secured loan is the borrower; giving the bank, (the lender); money, or the title to an asset (vehicle, equity or claim to possessions like household goods) to borrow money. You will tell the bank that you are trying to build credit and that you want to open a secured account that will be approved for that will help build credit. You must make sure make sure the secured loan will report to the credit bureaus and have at least 12 minimum monthly payments. Once everyone agrees on the collateral for the loan, you will be given money and have payments due before your collateral is returned. If the payments are on time your credit will benefit.
Having a mix of different types of credit is paramount even though it only accounts for approximately 10% of your FICO scores, that can mean a big difference between. Installment loans are good to have and are easier to obtain than you think. When you open an installment loan, you are financing something for a set amount, for a certain number of payments that eventually ends. Most range from 6 months to 60 months. Some common examples of installment loans are secured cash loans, financing jewelry, furniture, automobiles and a wide range of different products can also be considered installment loans. Many of the larger retailers offer financing of goods as “installment loans” that report to the credit bureaus, talk to their financing departments and you may be surprised at how many are willing to help you build credit with an installment loan.
Forced Savings Plans
When you open a forced savings plan you are actually taking out a loan and the entire amount of the loan is deposited into a savings account. You will be given set monthly payments. Each payment that is made unfreezes the amount paid and earns interest. The on-time payments are reported to the credit bureaus and you will end up with a nice little savings account when finished. Call Jennifer Segreto at Fifth Third bank to ask about their special savings account that reports to the 3 credit bureaus. Her phone number is (800) 972-3030 and her email is Jennifer.Segreto@53.com. Tell Jennifer that Credit Assistance Network sent you!
Secured Credit Cards
Most secured credit cards, debit cards or loaded value cards do not report to the credit bureaus, therefore they do nothing to improve your credit scores so it is imperative that the cards you choose will actually benefit you. The secured cards that report to the credit bureaus are far and few between so before you apply for one, please make sure they report to the credit bureaus. We promote several cards that can help you, please contact us if you would like to learn more.
Finance Instead of Purchasing
Financing goods or services instead of paying cash is a smart thing to do if you are trying to build credit. Paying on time will prove to prospective lenders that you can and probably will repay credit extended. Remember credit reports are a direct reflection of your spending habits and a risk factor of their probability of repaying the credit extended. You can finance furniture, jewelry, appliances, electronics, computers as well as almost anything you would normally pay cash for.
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Opening new accounts that do not report to the credit bureaus does absolutely nothing to help credit. Make sure that any new accounts opened report to the credit bureaus. When they do report, they are seasoning and building solid credit references that will be the foundation for future credit.
Few last minute tips to help you build credit:
Request credit line increases every 3-6 months. By increasing a credit line, available credit will increase and so will your credit scores.
Request lower interest rates every 3-6 months. If you are paying on time, chances are the creditors will not be reluctant to reduce interest rates and help you pay off debt faster as well as save money.
Keep balances low, preferably at $0. As a general rule of thumb the higher the balances are, the lower the score will be and the less likely it will be that creditors will increase credit lines or extend new credit.
Keep accounts open! The accounts your clients have now will be their oldest seasoned trade lines. If they close them, they will stop affecting their credit scores immediately.
Keep your reports clean. If you have any negative information on any of the 3 major credit bureaus, tackle it with our credit improvement program. We use federal laws and persistence to clean up credit reports.