Let’s start with a quick story, one that for many years I couldn’t reveal because it was embarrassing.
Sometimes, the hardest thing to do in life is to admit something that you’re ashamed of when you can block it out and pretend it never happened, right?
My credit score was around 540, back in 2005. That was just one year after I created Golden Financial Services. I was 25-years old at the time, finally just starting to mature.
Who’d think, the CEO of Golden Financial Services, where we help folks with their finances and getting out of debt – had a lower credit rating than most of his clients. Looking back at it today, as my credit score sits at just above 820, it’s almost laughable. But the truth is, fifteen years ago – my credit SUCKED!
Excuse my French, but that’s an honest and straightforward assessment of it.
My credit report was flawed with collection accounts, late marks, a reckless number of inquiries from over-applying for credit, unpaid medical bills, and even a car repossession.
When I moved from Florida to California, I didn’t close all of my Florida utility accounts, like my cable and electric. These unpaid utility accounts eventually became debt collection accounts, making my credit even worse. I had almost every type of negative mark that you could imagine on my credit report.
You’re about to learn how I went from having a 540 FICO score, to now having an 828 FICO score, according to my last credit alert from Credit Karma. No collections. No late marks. And over $500,000 in available credit. By the way, FICO is just another way of saying “Credit Score.” FICO is a shortened version of its full name, “the Fair Isaac Corporation.”
When someone says “FICO,” that’s the most popular version of your credit score, used by most lenders.
Well, without further ado, here’s my story. And I hope it inspires you.
Lesson #1: Use Past Mistakes to Fuel Your Desire to Have Excellent Credit
Between 18-24 years of age, I was still young and didn’t truly understand what good financial health meant and the long-term benefits of having a high credit score.
I don’t know about you, but back in my early 20’s, I wasn’t the same person that I am today.
Heck, I didn’t even want kids in my early 20’s. I remember saying, “I’ll never have kids”! I’d say, “I don’t even like kids.”
Today, I couldn’t imagine what life would be like without my two angels. My point being, your brain changes over time.
Don’t be ashamed of your past; instead, embrace your past mistakes and take the necessary steps to shape your future in a better way. Use negative feelings to fuel the desire to learn and improve your life.
Failed to pay your bills on time? Now set up automatic bill-pay and pay your entire balance not once but twice per month. Go the opposite direction from when you went down that wrong path. Let your past mistakes stay in the front of your brain, as if they are sitting in front of a magnifying glass and constantly keeping you aware of your credit and what not to do.
I distinctly remember getting rejected for a bank loan, that I needed at the time to do a business opportunity of a lifetime. I hold onto that depressing feeling that I felt after getting denied for a car loan because my credit score was too low. I keep these thoughts in the front of my mind, and they continue driving me to improve my credit score each day.
How to Have Excellent Credit, Lesson #2: Automatic Bill-Pay
Set up automatic bill-pay on all your credit cards and credit accounts, including your mortgage and car payment. Set up automatic bill-pay to pay your entire balance every month, not just the minimum payment.
If you want to make an extra payment, call the bank or credit card company and do it over the phone, but God forbid if you forget to make a payment one month, the automatic bill-pay will ensure your bill gets paid on time.
Back in 2004, I had about twenty debt collection accounts on my credit report, unpaid medical bills and even a car repossession.
Medical bills would come in the mail, and I would completely disregard them. I remember saying, “I don’t care about my credit report; I’m not paying this bill.” Yes, I was implausibly irresponsible at the time!
“Who needs credit, I’ll just pay cash,” I used to say. I’d tear through my mail faster than the speed of light and when seeing a medical bill, swoosh… slam-dunking it directly into the trash can, faster than I could read the balance on it!
“I’ll just pay cash.”
Eventually, I would regret those words. Like when I was rejected for a loan to expand Golden Financial Services–denied, after racking up 250,000 miles on my old Chevy Nova and desperately needing a new car–denied.
Credit Lesson #3: Get a Secured Credit Card
This nasty credit was killing me, but I was more determined than ever before to climb out of the hole.
At this point, my only chance of reviving my dying credit was to get a secured credit card. Nobody would issue me an unsecured credit card. I had applied for an unsecured card with five different banks, and all of them rejected me.
I decided to unmask a new self and grew the initiative to go to Bank of America, hand over $400 (hard-earned cash) and get my first secured credit card. It was time for me to crawl out of this hellish pit of lousy credit, finally.
Credit Lesson #4: Know When to Re-Apply & Strategically Address the Reason
Soon after I had applied at five different banks for an unsecured credit card and been rejected by all, I noticed my credit score went down even further.
That day I learned another valuable lesson. Don’t keep applying for credit after getting rejected over and over again in a short period expecting to get approved because you won’t. You’re only further damaging your score and will continue getting denied.
Luckily, inquiries only stay on your credit report for two years.
If you get rejected for credit, it’s imperative that you examine the reason for getting rejected. If you know why you were denied for credit, you can quickly fix the problem.
The bank may tell you that you were rejected for a credit line increase because based on your spending patterns they didn’t feel that you needed any additional credit.
This happened to me once. On one of my credit cards, the credit limit is $80,000, but I’ll only spend a few thousand dollars at a given time and then pay the entire balance in full. So, since the bank sees that I never let my balance go above $3,000, why would they need to give me more than an $80,000 credit limit? That was the bank’s claim, which did make sense to me.
Therefore, the solution would be to spend more money on this card before re-applying for another credit limit increase, showing the bank that “I did need the additional credit.” And I’m not referring to “wasting money,” or just buying things that I didn’t need. With me, all I did was used my Bank of America credit card every time I went grocery shopping instead of using cash. By using this card on all grocery purchases, I was able to show a higher amount of credit usage (which is what I’d needed to illustrate to get an increase in the credit limit).
This card also paid me 2% cash back on all grocery store purchases, which is why I choose to use it for only grocery shopping at that time.
The point being, know why you were rejected and fix the problem before re-applying or applying for new credit.
How to Have Excellent Credit, Lesson #5: Don’t Just Dispute Everything!
I decided to dispute everything negative on my credit, even if it was legitimate.
We hired a credit repair specialist at Golden Financial Services earlier that year. Her name was Marissa.
Marissa assisted me with disputing, against her advice – everything negative on my credit report. I remember telling her, “just dispute it all.”
Another BIG mistake.
After disputing something on your credit report, the creditor has 30-days to prove that what you’re saying is false.
If you dispute a debt collection account saying, “the account is NOT mine” when it indeed is your account, all that your creditor would need to do to verify the debt is legitimate is send the credit reporting agency the original agreement that you signed when initially applying for the account.
Subsequently, a derogatory comment would go on your credit report, illustrating that the debt was disputed and determined to be valid.
I had four disputes that went wrong, resulting in four of these ugly notations on my credit report. Right when I thought my credit couldn’t get any worse, it got worse!
How to Have Excellent Credit, Lesson #6: Dispute & Remove Derogatory & Inaccurate Information
The good news is, most of the negative marks that I disputed on my credit report, were successfully removed because of either being inaccurate, unverifiable or legally uncollectible. By removing these old collection accounts, my credit score shot-up by roughly 40 points.
Finally, my confidence level began to build. The reality started setting in, that I am doing it, rebuilding my credit score!
In some circumstances, creditors will ignore a dispute because it’s not worth their time to put together the necessary documentation to prove the legitimacy of a debt, and if ignored, the credit reporting agencies will remove the debt from the consumer’s credit report.
The more involved you make your dispute, the more time consuming it will be for the debt collection company to prove their claim, increasing the likeliness of them just ignoring it.
In many cases, a debt collection company won’t be able to validate a debt because they don’t have the required documentation and accurate information on file to do so.
Credit card companies will put a disclosure on the bill of sale when selling debt that specifically states, “records may be missing and inaccurate.” Debt collection companies are willing to take that chance when buying debt, knowing how unlikely it is for the consumer to dispute it.
Noach Dear, a civil court judge in Brooklyn who sees hundreds’ of credit card lawsuits each day, said that “it could be up to 90% of all credit card lawsuits are flawed, and specifically, they’re flawed because the credit card companies can’t prove the consumers owe the debt.”
Before I continue with my story, let me provide a few of the technical details about disputing a debt.
Just because you’re disputing a debt, doesn’t mean that you’re saying the account was never yours.
Professional credit repair and debt validation companies can dispute a debt and get it removed from a person’s credit report 9 out of 10 times. They do this by making the debt collection company prove that they have the legal authority to collect on a debt. Debt collection companies will either ignore a complex dispute or quickly respond with a letter agreeing to stop collection on the debt and remove it from your credit report.
Example letter, creditor agreeing to remove debt from credit:
Credit Lesson #7: The Fair Credit Reporting Act (FCRA) Gives You the Legal Right to Request Proof of Accuracy
“A 2015 study released by the Federal Trade Commission found that 23% of consumers identified inaccurate information in their credit reports.”
A debt collection company must maintain accurate information, including dates, spelling and the amount they claim you owe, according to the Fair Credit Reporting Act (FCRA). If you find inaccurate information on your credit report, dispute it right away. Your creditor must correct the mistake within 30-days or remove the account entirely from your credit report.
“Under the FCRA, creditors who furnish information about consumers to consumer reporting agencies must:
- Provide complete and accurate information to the credit reporting agencies;
- Investigate consumer disputes received from credit reporting agencies;
- Correct, delete, or verify information within 30 days of receipt of a dispute; and,
- Inform consumers about negative information which is in the process of or has already been placed on a consumer’s credit report within one month.”
Credit Lesson #8: The Fair Credit Billing Act to Dispute a Debt
Another aspect of disputing a debt is to make the debt collection company prove that what they claim you owe is void of any unauthorized charges.
Legally, you can request proof of how a debt collection company came up with the amount they claim you owe. You can request the last six-years worth of monthly statements and a breakdown of how each statement was calculated, illustrating where each cent was distributed and what services were included.
Some debt validation and credit repair companies will conduct a full forensic accounting audit to evaluate every single payment that took place, including all payments with the original creditor.
Here’s what the FCBA law says: The purpose of the FCBA “is to protect consumers from unfair billing practices and to provide a mechanism for addressing billing errors in ‘open end’ credit accounts, such as credit card or charge card accounts.”
If a debt collection company can’t produce documented proof of a debt, the debt becomes legally uncollectible. A legally uncollectible debt is one that doesn’t have to be paid and can’t legally be reported to the credit reporting agencies.
Debt Validation Example Letter
Why did this creditor agree to stop collection on the debt and remove it from all credit reports?
The collection agency could not provide:
1. a valid license to collect on debt in this particular state
2. the original agreement that the consumer signed when initially applying for the card
3. proof that the debt was inside its Statute of Limitations
What’s the difference between debt validation and credit repair?
Debt validation deals with the debt collection company, sending the dispute directly to the third-party debt collection company.
Credit Lesson #9: Switch a Secured Credit Card to an Unsecured Credit Card
After six months of using my secured credit card and paying the bill in full, not once but two times per month, now it was finally time to request that Bank of America switch my secured credit card, to an unsecured credit card.
Bank of America approved my request, and within 60-90 days, my credit score increased.
I now had my first unsecured credit card and could see the light at the end of the tunnel, and having excellent credit was getting closer quickly!
The reason why I switched from a secured credit card to an unsecured card, is that secured cards don’t carry as much weight on your credit score. That can be a good thing, or a bad thing, depending on if you’re paying your bills on time or late.
Positive payment history on an unsecured credit card increases a person’s credit score faster than that same payment history on a secured card.
Lesson #10: Pay Your Credit Card Balances Twice Per Month
You want to pay your credit card balance twice per month to build your “length of credit history” faster.
“Length of credit history” makes up 15% of your credit score. Think about it; if you pay your bill twice per month, you can get a year’s worth of payments completed within six months.
“To make multiple payments (also called micro-payments), you can either log onto the credit card issuer’s website or use your bank’s online bill-pay system. If you have an account set up, you can pay in seconds. It may take a few days before the payment is posted, but when it does, your credit card balance will be lowered by the sum you sent”, explains Erica Sandberg, a prominent personal finance author.
Erica says the benefits of using and paying off your credit card, multiple times in one month, include:
- 1. “Your credit rating should increase. By constantly borrowing and repaying with your credit card, you are proving that you are a responsible person. It’s an indication that you don’t rely on credit cards to make ends meet, but instead, are using plastic like a savvy professional. Credit scores are based on credit activity, and since you’ll have a robust history of perfect payments and no carried over balances, your scores should rise. Any new lender will view you as a low-risk customer and preferred accounts will soon be available to you.
- 2. You will always remain in the black. It’s absurdly easy to overcharge with a credit card, and many accounts come with large limits that can be too tempting. However, if you delete each charge as it happens, you will avoid racking up unmanageable card debt. All you have to do is ensure you have enough money in your checking account to cover your charges.
- 3. You’ll never pay interest or late payment fees.
- 4. Rewards! (which I talk about later in this post)
- 5. You will always be in control. I can’t tell you how many thousands of people I have spoken to over the years who have felt as if their credit cards and resulting debt have taken over their lives. It’s a terrible way to live, and also unnecessary. With the as-you-go payment method, you’ll enjoy an extra sense of control. You’ll never be shocked by the size of your monthly bill.”
Credit Lesson #11: Avoid Restarting the Statute of Limitations
The quickest way to see your credit score increase is to get a collection account removed, but even if a collection account remains on your credit report, as it ages, it has less of an adverse effect on your credit score.
In some cases, it’s better to just naturally let the account fall off, rather than disputing it and potentially creating an action that could restart the statute of limitations. Click here to see what the statute of limitations on debt is, in your state.
“Certain actions can restart a debt’s statute of limitations, including:
- acknowledging that you owe the debt
- making a payment
- entering a payment plan
- making an agreement to pay
- making a charge on the account
- accepting a settlement offer
Before challenging a debt on your credit report, check the date that the account is scheduled to fall-off.
Every debt collection account on a person’s credit report illustrates the projected fall-off date.
Credit Lesson #12: Establish & Build New Positive Credit
After disputing everything negative on my credit report, and the creditor verifying four of the debts to be legitimate, I was stuck with a few of these collection accounts on my credit report for another four years.
Over that four-year period, I focused on what I could control;
- establishing new credit
- using my new credit and paying the bill in full two times per month
- increasing my credit limits when possible
- And collecting lots of free income through cash-back baby!
Within four years, my last collection account would fall off my credit report, and I would finally have excellent credit!
I came up with a plan to either establish new credit or get an increase in my existing credit limit, every six months.
Instead of paying my credit card balances once per month, I paid them twice per month.
If I had only paid my balances in full once per month, it’s highly unlikely that I would’ve been approved for new credit every six months, due to insufficient positive payment history.
Credit Lesson #13: Have the Right Mixture of Credit
Gerri Detweiler explains the importance of having the right mixture of credit accounts in an article on Credit.com:
“When these accounts report on your credit records they are coded very accurately so that not only consumers and lenders but also credit scoring models can quickly identify them. Statistical analysis has determined that the type of accounts you have is predictive of your future credit risk. So, what does all of this mean you the consumer? Consumers with the best credit scores, including FICO credit scores, tend to have a mix of different types of accounts.”
At this point; I had my first unsecured credit card, but the road to building an 800+ FICO score would require me to have the right mixture of credit accounts that I pay on every month.
- 4-6 credit cards
- mortgage payment
- car payment
- installment bank loan
Lesson #14 on Building Excellent Credit: Bad Credit Installment Loans
After getting my first unsecured credit card, I visited the bank and opened a secured loan.
Anyone can get approved for an installment loan because you’re guaranteeing the loan with the funds from your bank account. The bank still reports positive payment history on a secured installment loan. Installment loans are an excellent tool for credit newbies to use when trying to build excellent credit.
Lesson #15: Improve Your Credit Utilization Ratio, Improves Credit Scores
I started to notice a trend over the years, while on my journey to building a high credit score.
Every time my credit limit would increase, so would my credit score.
Within 30-60 days after getting a credit limit increase, I’d receive an alert from my credit monitoring service with Credit Karma saying that my score went up another 10 points (on average).
By increasing your credit limit, you can improve your credit score – assuming your balance doesn’t also increase. Your credit utilization ratio makes up 30% of your credit score.
Here’s a simple example explaining what credit utilization ratio means, from CreditCards.com, “If you owe $100 on your credit card and have a $1,000 credit limit on it, your credit utilization ratio is 10 percent.”
How does credit card debt affect your credit score?
The more credit card debt you carry, the lower your credit score will be. If you have high credit card debt, you need to prioritize paying off your balances. As your credit card balances are getting paid down, simultaneously your credit utilization ratio and credit score improve. You can quickly clear your credit card debt by using the debt snowball or debt avalanche method.
If you’re behind on monthly payments and have high credit card balances, before your credit gets repaired, you’ll need to resolve these debts. If you can’t afford to pay off your debt on your own, at Golden Financial Services, we can tailor a program to get you out of debt in the quickest possible timeframe and include credit repair for no extra cost. You need to have more than $7,500 in unsecured debt to qualify.
Call (866) 376-9846 for a free consultation and to get debt relief advice from an IAPDA certified debt counselor. Our debt counselors will go over all of your debt relief options and explain the positive and potential negative consequences that come with each debt relief program. All debt relief programs will negatively affect your credit score. Therefore, if you join a debt relief program, make sure that you have a complete game-plan in place to not only get out of debt but also to repair your credit score.
Build Excellent Credit, Lesson #16: Don’t Apply for New Credit, Too Soon!
Every six months I would either apply for a new credit card or request an increase in the credit limit on one of my existing credit cards and continued to get approved each time.
I would never apply for credit on the same account, two times in a row and within the same year.
One time though, I was feeling confident because I had continued to get approved for new credit and credit limit increases, so I decided to apply for a credit limit increase twice in the same month but on two different cards – and was denied!
Now, I had another ding on my credit report that set me back a few points.
I was denied because I requested too much credit within a short period. Creditors see that type of behavior as “risky behavior.”
Credit Lesson #17: How to Raise Your Credit Score by 100 Points (in Less Than 5 Months)
The trick is called the “Credit Piggyback.” Clients of mine have told me that this trick raised their credit score by as much as 100 points in under six months.
Get added to someone’s credit card as a joint account holder. It could be your mom, husband or wife, and anyone who you know and trust. Just make sure that they have a high credit score. I used this trick, and it worked amazingly!
The credit card you get added to should be:
- A card with a high credit limit
- A card with a low balance
- A credit card that the person had for many years
By getting added as a joint account holder to that card and not just an authorized user, you equally share the risk and rewards associated with that card.
My mother added me to her eight-year-old Chase credit card, which had a $25,000 credit limit and an $8,000 balance.
My credit score jumped from 630 to 710, in 120-days. This strategy increased my credit score faster than any other tip on this list.
Here’s why the piggyback credit trick works like magic:
“VantageScore combines two factors; how long you’ve been using credit and what types of credit you have — into a single factor and considers it “highly influential.” FICO scores break it out a little differently, with the length of your credit history accounting for 15% of the score and the mix of accounts making up 10%. Whether you’ve had credit for six months or 20 years can make a big difference in your credit score.”
Credit Lesson #18: Keep Your Balance Under 30% of the Credit Limit (myth or fact?)
The credit experts always tell people; “it’s best to keep your balance under 30% of the credit limit”, but here’s better advice, the lower your balance, the higher your credit score. As your balance goes down, your credit score will go up.
“FICO has noted that below 20% is good, below 10% is better, and that people who have the highest credit scores average 7% credit utilization. However, your credit score should improve if you lower your credit ratios.”
And most importantly, why waste your money on interest? By paying your balance in full every month, you avoid all interest and can save thousands of dollars over your lifetime.
Lesson #19: You Need a Home Mortgage Loan to Build Excellent Credit!
At 27 years of age, I bought my first home. By this time, my credit score was about 730.
A 730-credit score is sufficient to get a home loan. You may not get the lowest interest rate, but you’ll get approved for a home loan and can use it to establish excellent credit.
At first, the purchase lowered my credit rating, but after eight months of paying on my mortgage, I started to see the benefits. I received an alert from my credit monitoring service saying, “your score just went up to 750, congratulations and keep up the great work.” Over the years, I continued to see my credit score improve thanks to my on-time mortgage payments.
Now keep in mind, I still had some collection accounts on my credit report, which required me to put a hefty 20% down payment on my home purchase and suffered from a near six percent interest rate.
At that point, I applied for a third credit card with Best Buy, six months later a fourth credit card – and then a fifth. And today, I take great care of my credit, and I’m incredibly meticulous with how I use it.
Credit Lesson #20: Use Credit Cards for All Purchases
My Bank of America credit card pays me over 2% cash back on ALL purchases, and therefore I use this card for almost everything.
Why would I pay cash, when I can get a discount on the purchase if I pay by credit card?
If I travel for work, I use my Chase card and get 3% back on all travel-related expenses.
Lesson #21: How to Earn Tax-Free Income & Increase Your Credit Score Simultaneously
By using your credit cards on all purchases and paying the balance in full two times per month, you’ll build excellent credit fast and earn cash-back. Just recently, I learned that the money you get paid from cash-back, the IRS considers to be tax-free. This is huge! Where else can you find tax-free income, besides your retirement account? You can simply transfer the funds into your account and not have to worry about paying the taxes on it.
Credit Lesson #22: Carefully Evaluate Credit Cards Before Applying
One last vital mistake I made during my journey from bad, to excellent credit, is that on my first three credit cards I didn’t carefully evaluate them before getting applying. I was just so excited to be able to get approved for my first few credit cards and was only focussing on the fact that I needed 4-6 cards to build excellent credit. These three cards don’t pay me a single penny in cash-back. They’re a waste.
My income would be higher today if I selected cards that paid me cash-back on those first three. Don’t make that same mistake.
Make sure to carefully evaluate a credit card before applying for it, and only get credit cards that pay you cash-back.
Credit Lesson #23: Don’t Cancel or Close a Credit Card
You may be wondering, why don’t I just close the credit cards that aren’t paying me in cash-back and replace them with another?
According to an article on Money.Cnn.com,
“Closing an old credit card can hurt your credit utilization and your length of credit history. First, the former. For your credit utilization ratio to help your score, it needs to stay at or below 30%. This means that if your total line of credit is $10,000, you shouldn’t owe more than $3,000 at any given point in time. Therefore, if the card you’re thinking of closing gives you a $5,000 limit, and a replacement card only offers a $2,000 limit, you could end up in a scenario where you exceed that 30% threshold and wind up hurting your score. The same holds true if you cancel your credit card and don’t get another one in its place.
Then there’s the length of your credit history. Having, say, a 15-year-old account in good standing will help your score, but if you cancel that account, it’ll typically get removed from your credit record after about 10 years. Therefore, while you won’t necessarily feel the impact of closing that credit card right away, it could come to hurt you over time.”
On my Bank of America credit card, they offered me an upgrade. The upgrade would be for a newer credit card that was for their preferred customers and paid a higher amount in cash-back. I agreed to this upgrade because the bank guaranteed that my credit limit would stay the same.
Lesson #24 on How to Build Excellent Credit: What’s the Interest Rate?
“35% of credit card users don’t carry a balance – they pay off their bill every month.”
The other 65% of consumers who do carry a balance are paying thousands of dollars in interest, and just giving their hard-earned money away to the banks. Plus, credit cards come with variable rates, so if the Federal Reserve votes to increase the Federal Funds Rate, your credit card interest rates will also rise – making debt harder to pay! The Federal Reserve already increased interest rates twice this year, and two more rate hikes are still expected to come.
“The average card APR climbed to a record high of 16.47 percent after the Federal Reserve raised its benchmark interest rate by a quarter of a percent, prompting many card issuers to do the same.
Statistically, more people carry a balance at the end of the month, compared to those who pay their balance in full.
Who do you want to be?
Do you want to get paid by the credit card company every month?
Do you want to pay the credit card company every month?
Here’s an excellent post on how to benefit from credit cards and monopolize on using cash-back.
Here’s a summary of this last point; pay close attention to the rewards, cash-back and interest rate, that’s associated with any credit card before applying for it.
About the author: Paul J Paquin
Paul J Paquin is the CEO of Golden Financial Services (GFS), a top-rated national debt relief company, that’s also A+ rated by the Better Business Bureau. GFS started offering debt settlement services in 2004, and over the years added debt validation and consumer credit counseling debt relief options to its infrastructure. Consumers have the power to choose from multiple debt relief programs at GoldenFS.org, which is one of the key ingredients to the company’s success.
Paul is also an aspiring writer and author, publishing multiple books and contributes editorial content on industry leading websites, including ValueWalk.com and SemRush.com. Check out Paul’s last article called “10 Best Ways to Clear High Credit Card Debt“