Optimizing Your Credit Score

Besides getting negative credit items deleted from your credit report, there are several things you can do to optimize your credit score. Even if you already have good credit, making a few changes can help make the difference between a 720 credit score and a 760 credit score and help you get approved for the lowest rates offered.

The first thing to consider is that the length of your credit history comprises 15% of your credit score. Obtain credit early, as long as you can responsibly manage it. If your parents didn't help you get a credit card while you were still in high school, or if you didn't obtain a credit card or car loan as soon as you turned 18, you might think there's no way to travel back in time. Wrong! If you have a parent, grandparent or spouse who is willing to add you as an authorized user to a card in good standing that has been open longer than any credit you currently have, their credit history will be added to your report.

It's important to remember that the card must be in good standing (now and in the past) or adding it will have a negative impact on your report. If someone is leery about adding you to their account, they can always cut up your card as soon as it arrives. My husband is an authorized user on three of my cards, but doesn't have any of them in his possession.

Not every company reports authorized users to the credit reporting agencies. Most do, but USBank for example doesn't. In my case, my oldest credit card was a USBank card. Once my husband's credit had bounced back I applied to add a joint user to the card rather than an authorized user. This means that he is as responsible for the bill as I am, not just allowed to make charges to the account. This way it actually showed up on his reports.

Besides establishing a long credit history, your score is also impacted by the average age of your accounts. Opening new accounts all over the place will lower your average credit age. Be thoughtful when you apply for credit. I wish I could open cards all the time for the bonuses that often come with a new account, but because of the hit my credit score would take it isn't worth it to me. I stick to opening bank accounts instead of credit cards for the incentives.

Opening a lot of new accounts also means that your score will take a hit because of inquiries. Every time you apply for credit, a new inquiry appears on your report. Sometimes this will be on just one, sometimes it will be on all three. Inquiries make up 10% of your credit score, and it is best to have one or two inquiries at most. Multiple inquiries can also make it seem to creditors like you're scrambling for money, and can result in a denied application for credit.

One of the biggest factors that impacts your score is the utilization of your credit cards. If your card is maxed out it will have a very bad impact on your credit report - even if you're making all of your payments on time. It is best to show a total utilization of about 1% (for some reason this is better than 0% - I guess because if you're showing zero you're not demonstrating an ability to actually use credit) but anything in the 10-20% range is pretty good. The lower you are, the better.

Add up the total balance on all of your cards and divide that by the credit limits of all of your cards. This will give you your utilization percentage. If you have multiple cards, it's best to show use on only one or two of them, and for that utilization to also be low. Even if your total util is only 1%, if you still have one maxed out card your credit score will take a hit.

Keep in mind that different cards report credit limits at different times, so even if you're paying off your card in full every month you might find that your credit report still shows balances. I can only speak to my experience but here's the way my cards report:

• USBank - Reports the credit balance on the last day of the month. Even though my payment isn't due til the 3rd or 4th, I pay it on the last day of the month so that my util will be low.
• FIA Fidelity - FIA is a division of Bank of America, and reports the same as them. They report the balance on your statement. If you want to avoid a balance showing up when using a card like this, you will need to pay the card off right before your statement cuts (so about a month before the actual due date).
• American Express - AMEX is a tricky beast. They report your statement balance from the previous month just after your statement cuts. So, if my statement balance in January was $500, when I get my statement in February for $200 my reports will update with a balance of $500. If you want your American Express card to show a zero balance, you'll have to plan ahead.

Note: Even though my FIA Fidelity card is an American Express, it follows FIA's reporting guidelines. Only cards obtained directly from American Express should follow AMEX's guidelines.

Although my credit has always been very good, I have used utilization tricks to maximize my score. By making sure my utilization was at 1% on only one card, my score went from about 730 to about 760 and I got the very best rate possible when I purchased my Prius.

By adding some credit history and higher utilization to my husband's credit, I pulled his scores from around 650 to just under 700 - a huge difference from where he started at 470!

How To Fix Your Credit

I posted my husband's credit story yesterday. The happy ending is that I pulled his credit up from the 470 toilet to just under 700, and you can too.

First, we pulled his credit reports and took a look at every collection. Sometimes it was hard to figure out what was what since the same collection might look different on the three different credit reports. By matching up amounts and account numbers, we were able to isolate the 13 accounts that were showing up on his reports.

Next, we paid everything. For some people, if a collection is old enough it might make more sense not to pay. If it is outside the statute of limitations you might not legally have to pay it. If it is that old, it might also be about to come off your report altogether and your money would be more smartly applied elsewhere.

Negative accounts stay on your report for up to 7 years. Your credit report will often give an estimated date that the collection will be removed. If you can wait for this date, it could save you money. However, if you're trying to fix your credit now you might need to suck it up and pay. For instance, most lenders require that all collections be paid in order to be approved for a mortgage.

If you do plan to pay off your collections, contact the creditor and discuss a pay for deletion agreement. Offer to pay the collection in full in exchange for it being deleted from your credit reports. Get the agreement in writing! Some creditors will happily do this, others will not. But always make an attempt before you just go ahead and pay anyway.

If you have a paid collection still on your credit report, you can still ask for a "good will" deletion. This means you contact the creditor (I've done it by phone and mail) and ask them to delete the paid collection out of the kindness of their hearts. Since we paid all of my husband's collections to stop garnishment of his bank accounts, this was our only way to get collections of his reports. We sent letters out on all of his accounts. Our very first response was successful! A local collection company agreed to delete 2 medical collections.

Our next responses were negative. Don't give up. Try again. Try again. And then try again. You might reach someone else (try mailing to different addresses!) who will take pity on you. You might annoy an office so much they finally give up. If there's a paid collection on your report the worst that can happen is that it stays there, so don't be afraid to bug a collection company until you get a deletion. Persistence pays off! In the end we got all of his collections deleted except his student loans and a Bank of America charge off - both notorious for never deleting.

If you see something on your report that you don't recognize or understand, try disputing it. Sometimes a collection will be removed as easily as that. If it comes back as verified, you can send a letter to the collection company requesting verification of the debt. If they can't provide this, my advise would be to continue disputing it. We disputed one of my husband's collections 3 times while also sending letters to the collection agency before it was finally deleted the 4th time we disputed.

If there are unpaid collections on your report, be prepared to pay them before you start trying to get them removed. Taking action can wake the beast, so to speak. You might find yourself barraged by phone calls. If you want a collection that should really be there deleted from your report, you're most likely going to have to pay it off first.

Once the majority of the issues on my husband's report were fixed, his credit bounced to 650 - a huge and welcome improvement! We then looked at ways to maximize his credit score. These are tips that can be applied even if you don't have any credit issues - coming in the next post!

A Bad Credit Story

When my husband and I first started dating I had no knowledge of his financial situation. Then, one night out at dinner his card was declined. He couldn't understand how this was possible since he had just deposited his paycheck. It turned out that his account had been garnished. An unpaid collection had become a judgment and had been granted permission to take payment straight out of his account.

I have always had good credit, and grew up with parents that weren't necessarily perfect with money but who taught their children about it. My husband grew up in family with no financial plan, often surviving on unemployment and constantly in collections or facing evictions. In his late teens he found himself faced with thousands of dollars in bills that he had no clue how to pay. With no financial education whatsoever he chose to ignore them rather than working out a plan. Of course they only got bigger and bigger and went to collections. He handled that by never answering a phone call from a number he didn't know. This was his financial plan.

When everything finally caught up to him, we pulled a copy of his credit report and started figuring out what he owed. A few thousand in bills had turned into $6,000 of collections. All in all, there were 13 negative entries on all 3 of his reports, and his credit score was 470.

We immediately began paying his collections. This is often not suggested as collections could be outside of the statute of limitations during which they can collect, and paying a collection can often wake a sleeping monster. It's also advisable to try to work out an agreement with the collection agency to delete the negative entry in exchange for payment. But I didn't know any of this yet, and with his bank account being garnished he really had no choice but to pay. We contacted the main collection agency and stopped the garnishment by setting up a payment plan. I made the payments on my credit card since he didn't have one, and he paid me back over a period of a few months.

When his car broke down and he was forced to buy a new one we found out how much a credit score of 470 hurts. I could have cosigned the loan for him at a much lower rate, but we had only been together a matter of months, and I was already extending myself by paying off his collections while he repaid me. Since ultimately we got married, it probably would have worked out for us if I cosigned (and saved him a lot of money!) but I still think I made a safe and responsible decision for myself. If you ever cosign a loan, you might find yourself trying to fix your credit one day too. Without the help of my good credit, my husband accepted a 24.99% car loan.

Just to give you an idea of the weight of that money, amortized over 5 years that would mean paying $7,607 in interest on a $10,000 loan - almost double the price of the car! A 3.9% rate (the rate he was approved at just two years later) would cost only $1,022 in interest.

In my next credit post I'll tell you how I went about pulling his credit scores out of the toilet, but first I wanted to illustrate exactly what a bad credit score can end up costing you and how important it is to be careful with your credit. If you don't know what your credit report or credit score look like, you can buy your score and report here or get a free copy of just your report here. And if you find any problems or mistakes, be sure to come back to find out how I brought his scores up to just under 700 so far!

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