By Mike Heayn Real Estate 101
DO CREDIT SCORES AND HOW THEY ARE achieved confuse you? You are not alone, most individuals have no idea how a credit score is generated. I have read many books and pamphlets on credit scores, but none have been as effective as “7 Steps to 720,” by Philip X. Tirone. In his book, Tirone clearly states what a credit report and score are and how to improve them. I will touch upon three of the steps to improving your credit based on Tirone’s book.
Keep your credit card balances low. Tirone recommends keeping your credit card balances below 30 percent of the credit limit. What people do not realize is that thirty percent of your credit score is comprised of your outstanding balances. Another thing people do not realize is that the credit bureaus use computers and thousands of algorithms to determine a person’s credit score. In a lender’s eyes, if you are using more than 30 percent of a credit card balance you could be using the credit card to live on or you may maybe able to pay back the unsecured debt, which no lender wants to see. Tirone states three options to bringing your credit card balances to the 30 percent or below number. You could transfer balances until each credit card reaches the 30 percent or less number, pay off the debts that put your credit card balances above 30 percent, or call the credit card companies and ask them to increase your limit to the point where your balance is 30 percent or less. However, with the latter strategy most credit card companies are not going to increase your balance if you have maxed out the card. For example, if you have a credit card with a $10,000 limit and have used all $10,000, the credit card is not going to increase your available limit to $30,000.
It seems counter intuitive to have to go out and get credit cards and accrual some level of debt even if you can pay cash for everything, but credit reports show how a person manages debt. A lender wants to see a person’s ability to pay back debt, so having a credit card and paying it on time is critical. Tirone states that having at least three credit cards is optimal for a good credit score. Once again, the reasoning comes down to computers analyzing several factors. Tirone brings up a good point stating bank check cards with a Visa or MasterCard logo are not credit cards and do not help or hurt your credit score. Just because you opened credit card lines does not mean you have to use them, so get cards with no annual fee. Also, do not go out and get twenty credit cards at once. Credit scores are like walking a tight rope — too many credit cards or open trade lines will actually negatively impact your credit score. Three credit cards is a good number.
Fifty years ago, it was hard to imagine paying for something with a piece of plastic, but today it seems strange paying for something with cash. Do not get me wrong, a lot of people still pay for large purchases with cash, but many young people do not. Most young individuals finance large purchases such as electronics, furniture, etc. The most common financed purchase for young individuals is a car. Financing a car involves paying it down at a set interest rate over a set time. This enables a person to make a big purchase and service the debt over a few years instead of purchasing it outright with cash. This is known as an installment account since you pay monthly installments until the item is paid off. Your credit score should reflect at least one installment account. A mortgage counts too, but if you are trying to get a mortgage, it helps to have a record of timely car payments.
In simple details, Philip X. Tirone explains the reason credit exists, how it works and most importantly, how to improve your credit in “7 Steps to 720.” If you want to increase your credit score or just learn how credit works, I would recommend reading his book. The best tool to increasing your credit score is knowledge, time and a plan. “7 Steps to 720” will give you knowledge and a plan, all you have to do is put in the time.
MIKE HEAYN is a Washington Mutual multi-family loan consultant. He (310) 428-1342, or e-mailed at
Originally published in the Santa Monica Daily Press print edition on July 25, 2007. Read the original PDF.