Depending on your credit score and your buying habits, you might receive a few or a lot of pre-approved offers in the mail. But there is something else that determines whether or not you get them.
Pre-approved doesn’t necessarily mean that you will get credit or that you will get the terms mentioned in the offer. All it means is that you are in the category of people who fit the marketing strategy of the company offering credit.
Here’s how it works.
You fit the profile of the marketing list that is sold by the credit bureaus to someone looking for more customers. Maybe your credit score is in the range they specified. Maybe your income fits what they have deemed their ideal customer. You might have a certain amount and type of debt they think makes you a good customer for them.
Or maybe you just had your credit pulled for some kind of purchase. When you apply for credit, there is a much larger chance that your information will be sold to other creditors who offer the same type of credit.
I just had it happen to one of my clients today. He applied for a mortgage and I had his credit pulled. Within a day, he got a phone call from a guy who said, “We pulled your credit.” This was a lie since I was the only one who had pulled it but the guy had a shocking amount of information about my client, including his phone number and email address.
The guy was really smooth and almost had my client applying for the same loan I am doing for him because he thought he was talking to someone in my office. When he realized they guy wasn’t working for me, he ended the call but had already given him a fair amount of personal information.
If it sounds invasive and covert, that’s because it is.
The point is that your personal information is being sold to as many people as the credit bureaus can sell it to. Even though they can’t sell your social security number, they can sell most everything else and the rest of it can probably be found on your social media sites (mother’s maiden name, birth date, first car, etc.).
So now that they have enough information about you to sound logical, they can call you or send you offers in the mail, some of which look like they are from your current creditors if you don’t look too closely. They know your credit card balances, your mortgage company, approximate credit score and plenty of other information.
Then they send you offers. The offers always sound great because they assume you will qualify for the best terms they offer. I wonder what percentage of the people who respond to the offers actually get those ideal terms. My guess is that it’s pretty low.
If you don’t qualify for their best terms, you may get a decent offer anyway. Maybe you will get a lousy offer. Or maybe you will just get an extra ding on your credit because you allowed them to pull it before they said no.
The bottom line is that pre-approved offers can be okay but it isn’t really that hard to locate the type of lenders you need so wouldn’t it be better to just locate them yourself? That way, you are in control of who you talk to and you know who you are calling instead of wondering if you are being scammed by a cold caller offering you money.
Fortunately, there is a way to stop the pre-approved offers if you don’t need extra paper for starting fires in the winter. And it’s really easy to do.
All you have to do is go to https://www.optoutprescreen.com/ and you can either opt out for 5 years or permanently. Opting out for 5 years can be done online. If you want to opt out permanently, there is a form to fill out and mail in. The website and ability to opt out are mandated by the Fair Credit Reporting Act.
If you ever decide you want to receive pre-approved offers again, whether it is because you’re lonely without all that mail, need a stranger to talk to on the phone or just because you need more offers to make sure creditors are still interested, you can always opt back in.
When you opt out for 5 years, there is a really easy way to keep track of when it is time to renew. It is when you start receiving offers again. My 5 years is up and so is my volume of mail. I guess it’s time to go back in and turn off the junk mail faucet.
One of the most difficult things to do with regard to credit is to improve your scores once they have dropped. It doesn’t matter if it is because of late payments, balances on credit cards being too high or something else.
There are two main reasons for this difficulty. They are a lack of knowledge of how to do it and an inability to confront the subject. The inability to confront the subject is actually connected to the lack of knowledge on the subject of credit.
If one had the knowledge, it would be much easier to confront. But because credit and finance are not taught in high school and because these subjects have been made more complicated than necessary, it is hard to really learn enough about them to get a good understanding of them.
Not having the understanding necessary to control anything will put you in a position where you find it difficult to confront it. The subject of credit has been made less understandable so that certain people can profit from it.
My goal is to give you the knowledge and power so they don’t profit from you. Instead, I want you to profit from having good credit, getting better terms when you use credit and not being taken advantage of.
So if you or anyone you know has had their credit score drop for any reason, this post gives you one of the tools that can be used to increase credit scores.
Re-establishing credit after your score has dropped is a key to getting it where you want it. Honestly, I think most people don’t do anything about it when their scores go down. Instead, they either ignore it completely, complain about the unfairness of the credit scoring system or stop using credit, at least for a while.
Fortunately, there are some easy ways to begin re-establishing credit after things have gone wrong. One of the simplest ways is to use a secured credit card.
A secured credit card is different from regular cards because it is actually secured (backed by something of value). Most credit cards are given without anything to ensure the debt is paid other than the threat of being reported to the credit bureaus, being sent to collections or being sued for the unpaid amount.
Secured cards are different. Here’s how they work.
You open a savings account for a certain amount and get a credit card for the same amount. You can’t touch the money in the savings account as long as the card is secured by it but it helps you establish a new account without any late payments. This is very important for anyone who either has bad credit or no credit at all.
It is also very easy to get approved for a secured card because there is very little risk of loss on the part of the credit card issuer.
There are some tricks in using this account. Here are the main ones:
- Only use it once a month for something that you would normally pay cash for. This keeps your balance low, improving your credit score.
- Pay the balance every month. After all, you would have paid cash for the thing that you bought anyway, so just treat it like cash and pay it off. This prevents you from wasting money by paying interest on the card.
- Just in case you forget to pay the bill on time, set up an automatic payment for at least the minimum required. This prevents you from having any late payments on the account which would damage your credit and cost you more money.
- Get the card from a credit union rather than a bank. Credit unions are more likely to approve you and they have lower interest rates than banks.
If you follow these simple steps after having your credit scores drop, you will see your credit scores increase. This can happen in a relatively short period of time. I used this information to re-establish my own credit after going through a bankruptcy.
At the time, I didn’t have any credit score because I hadn’t used credit for about 4 years. Within 9 months, my score was over 700, putting me in position to use credit to my advantage.
If you liked this tip and want more information about credit, go to CrackMyCredit.com
It’s no secret that the credit scoring models used to generate your credit scores were created for a purpose. The original purpose was to determine the likelihood of having a 90-day late payment within the next two years. Clearly, credit scores are inadequate to achieve this purpose.
Credit scores don’t take into account any of the other factors that could cause someone to be late on any payments. For example, they don’t include any data on your income, savings account, the condition of the business or industry you are part of, inflation, the economy or anything else other than your accounts that are reported to the credit bureaus.
And even if the 90-day late prediction is still the stated reason for their existence, there is much more to the use and manipulation of credit scores now than was ever stated when they came into existence.
The problem is that the scores are arbitrary. Algorithms have been created and changed over time that affect credit scores. Within these algorithms there are things that cause scores to go up and down when certain things happen. For example, opening a new account can cause your score to go down. Closing an account can also cause your score to drop.
But new accounts, in spite of these algorithms, do not always increase the likelihood of you being 90 days late on an account. How about when you open a new account so you can get the money needed to increase your income? That should decrease the likelihood of you getting behind on your bills.
There are tons of other examples I could use to show that the system is flawed. It isn’t hard to show.
The big question is, who benefits from lower credit scores?
There are two main groups who benefit, plus one large company. The groups are credit reporting bureaus and banks. The large company is Fair Isaac, the creators of your credit scores.
Here’s how it works. When you have a high credit score and a clean report, you decide to buy something on credit and you are given that credit with low rates and good terms. In most instances, your credit is pulled once then you buy.
But when you have bad credit or even fair credit, it doesn’t work the same way. Often, you try to buy something on credit but need to check multiple places, either because you were turned down or because the rate and terms weren’t what you wanted.
Using an example I have seen often, late’s say you are looking for a mortgage and get turned down at your bank after credit has been pulled. Then you go to a mortgage broker who pulls your credit. Even if he can do the loan, the lender he uses will normally pull credit too. Sometimes, the broker can’t do the loan and the you have to check with someone else.
Eventually, you end up having your credit pulled 3 times, maybe more. And every time your credit is pulled, Fair Issac and the credit bureaus make money. In this case, they have made at least 3 times as much money as they would have if you had been approved by your bank.
Since I have now mentioned banks again, let’s go into how they profit from lower credit scores. It’s really very simple, if you have an 800 score, you pay the lowest rates. If your score is a bit lower but still pretty good, you might pay a little more. But if your score is bad, your interest rates will be significantly higher.
In short, the higher your credit score, the less money is made by banks, credit bureaus and Fair Isaac. The lower your score, the more money they make.
The way to combat this and pay less for credit is to learn how your credit score is created and take the steps necessary to improve your scores, putting you into a stronger bargaining position.
For the past couple of months, a day hasn’t gone by that didn’t contain COVID-19 in our everyday conversations. While this is distracting at the very least, there are other effects besides people getting sick and the economy being mostly shut down.
And for the record, COVID-19 did not cause the economy to shut down. The hysteria caused by mainstream media and certain politicians is what has caused most everything in our economy to stop.
I can’t say for sure whether the shutdown was intended to cause damage to the world economy but I believe it was, just like the “Great Recession” was engineered by the big banks so they could make billions of dollars while the economy crashed and many smaller banks went out of business. (I could go on about this but that is a subject for another post.)
With the economy shut down, it is no secret that many people have been hurt financially. No one knows the full extent of the damage at this point but it will certainly be talked about in the months and years to come. The fact is that the most damaged will be small businesses.
Unfortunately, small businesses employ more people than big businesses do. This fact makes it clear that when you damage small businesses, you are hurting the majority of the population. And in spite of bailout money (which I still haven’t seen anyone receive, regardless of the claim that all the money has been spent), many small businesses are facing difficult times, now and in the near future.
This will cause some of them to close, affecting not only the business owners but also employees and their families. More people will miss mortgage payments, credit card payments and car payments because of reduced or no income.
And while I cannot tell a client not to make a payment (this is against the law for someone who is a licensed loan officer), I will say that people will need to make choices.
When you can’t make all your payments, you will need to prioritize your bills. Food, while not technically a bill, has to be a top priority. Rent or mortgage is next. Car payments could be next. credit card payments will likely be at or near the bottom of the list.
No one wants their credit score to go down the tubes but we all have to make choices. One’s credit score may have been a top priority when things were easier but when it comes down to a choice between your credit score and keeping a roof over your head or feeding your family, to hell with the credit score. You can fix that later.
People are going to have late payments. They are going to have higher credit card usage. They are going to be looking for more credit to get through the problem of having less income. All these things are going to cause a decrease in credit scores.
There will be millions more people looking for solutions to their credit. Some of these people will go to credit counseling services that may or may not explain to them that their credit scores will most likely drop like a stone. Others will sign up for credit repair to fix the problem. Maybe it will, depending on what company you choose.
But none of this changes the fact that the average credit score is going to go down in the aftermath of COVID-19. People will need solutions to get their credit scores fixed. And there are solutions. Choose wisely.
You may already know that the biggest part of your score is determined by your payment history. Lots of people know this but they don’t really know how much of their score is caused by it or what the different pieces of it are.
Even though your payment history is the biggest part of the calculation of your credit score, it is still only 35% of it. It would make more sense to most people if the way they pay their bills was worth a lot more than a third of their score.
I couldn’t tell you how many times I have had people call me for a loan and tell me that their scores aren’t that high but that they pay everything on time every month and have done so for years. There is always a tone in their voice that tells me they don’t think it’s fair. Maybe it isn’t.
But fair or not, it is still the system we are working with. We may not be able to change the scoring system, but knowing how it works can help us overcome its pitfalls. So without further discussion, I am going dive into how your payment history affects your credit score.
There are three main parts of your payment history. They are recency, frequency and severity.
Recency means how recent any late payments have been made. If a payment was late this month, it will have a far greater effect on your score than if it had been two years ago.
You can even divide late payments or on-time payments into three different time-periods to see how much effect they will have on your score. Anything within the last 6 months will have the biggest effect. The next tier is from 7 to 24 months and the last tier is anything more than 24 months ago.
Frequency has to do with how many times late payments have occurred on your credit report. If you have only one late payment on your entire report, it shouldn’t affect your score too much, unless it is your only account but I will get to that later.
Severity has to do with how late a payment (or payments) have gotten. Nothing is reported to the credit bureaus unless your payment is at least 30 days late. So if you missed the payment due date and were charged a late fee, it does not mean that it will show up on our credit report.
Late payments are reported in 30-day increments. A payment could be 30 days late, 60 days late, 90 days late, 120 days late or 150 days late. That is the highest it goes on a credit report.
The 90-day late will have a far greater effect on your credit score than a 30-day late payment.
Combine these three things and that is 35% of your credit score.
For more information about credit, you can find my book, Crack The Credit Code, To Play The Game, You Need To Know The Rules which is available on Amazon. Or, go to my website, CrackMyCredit.com.
By now, you have learned that your payment history is the biggest part of your credit and that it makes up 35% of your score. This next factor makes up 30% of your score so it is almost as important as payment history.
It is credit usage and it is the percentage of your available credit that you are using. This only applies to credit cards or what your credit report refers to as revolving credit, meaning that you can use it, pay it down and use it again. This isn’t something you can do on a car loan or a mortgage.
An ideal situation is that you use no more than 30% of the available credit on your cards. But just because you go to 31% does not mean your score will suddenly drop, it will only be slightly lower than if you were using 29% of your available credit.
If you want your score to be at its best, your usage would need to be under 10% but, believe it or not, it should be above zero. In other words, your score will be higher if you use some credit than if you don’t use any at all.
Other important thresholds on credit usage are 50%, 75% and 100%. When your usage goes over each one of these, your score will drop, especially if you go over 100% which means you are over your limit.
When you consider that 30% of your score is based on the percentage of credit you are using, it becomes important to have more credit than you actually need. The question becomes, how much credit do you need? And the answer is calculated by first figuring out how much you are going to use.
If you expect that you are going to use $5,000 on credit cards, you should have about $20,000 in available credit. This would keep your credit usage at 25% which puts you under the first threshold of 30% usage. To the credit bureaus, this means you “use credit responsibly”.
It may not be possible to have enough credit to keep your usage under 10% or even under 30%. If this is the case, do what you can do keep it under 50%.
For more information about credit, you can find my book, Crack The Credit Code, To Play The Game, You Need To Know The Rules which is available on Amazon. Or, go to my website, CrackMyCredit.com.