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Credit Repair and the Hidden Power of Credit Cards

Jun 9, 2008
Credit Cards Hold the Key

There is nothing like the subject of credit cards to get people excited. Credit cards can be a great convenience, or a weapon of financial destruction. But there is more power in that plastic than you think. Credit cards also hold the key to higher credit scores and speedy credit repair success, if you know the secret.

The Growing Importance of Your Credit Score

Credit repair revolves around credit score improvement, and for good cause. You are probably aware that a low credit score can keep you from getting the credit you want. But did you know that lenders set interest rates based on credit scores? Late in 2007, Fannie Mae and Freddy Mac, the federally charted mortgage giants, modified their pricing to be more sensitive to credit scores than ever before. Even borrowers with excellent credit will now have their rate adjusted based on incremental score differences.

Every Point Counts

Mortgage lenders are not alone in their recent pricing policy changes. Auto finance companies, long known for tiered pricing, have also sharpened their pencils and are more score sensitive than ever. If you are applying for a loan you should be aware that every point on your credit score could affect your interest rate. Fortunately there is a way to control your credit scores and hasten your credit repair goals.

Credit Cards the Credit Repair Powerhouse

Effective credit repair is all encompassing. But there is a special category of debt that offers more control over your scores than you ever imagined - if you know what to do. Credit cards have a special place in the FICO scoring model, and therefore in your credit repair effort as well. Fair Isaac and Company, the creator of the FICO scoring model, interprets the way you use your credit card as a primary indicator of the risk a lender will assume when lending you money. And there is reasonable logic involved.

Credit Cards as a Barometer of Risk

Fair Isaac and Company is in the business of measuring the risk of lending money. Their method is to assign numeric value to every behavior they can identify within your credit file. These values are measured by a complex algorithm, or formula, which they license to the credit bureaus. The credit bureaus apply this formula to the information they collect about you and come up with a single number; your credit score.

Credit Card Behavior

Fair Isaac gives your credit cards special importance because your balances can change monthly and contain several indicators of potential risk. The indicators measured by Fair Isaac include your payment record, your balance relative to your high credit limit, and the age of the card. In addition, the importance of each indicator varies based on the value of the other categories. Let's see why.

Credit Repair Rule Number One - On Time Payments

Many people involved in a credit repair effort open new credit cards to rebuild their credit. If managed correctly this can be a powerful score booster. But there is a dark side as well. If you miss a payment Fair Isaac will cut your score dramatically as a way of alerting lenders that you are a high risk. It's simple. Your new credit card was seen by Fair Isaac as a test of your ability to manage new debt. And you failed. Credit repair rule number one, make your payments on time.

High Balances Equal Credit Repair Trouble

So, you got a new credit card, ran the balance up to the limit, and now you wonder why your credit repair efforts are not working. You can afford the payments, and you're making them on time. What's the problem? Unfortunately, all Fair Isaac can see is unproven debt and a person who may have no restraint. So you get categorized with a statistical majority who get in over their heads and soon default. As a result Fair Isaac will knock your credit score down to warn potential lenders to steer clear. Do you want to keep your scores up? Please keep your balances down.

The Age of Your Credit Cards

Once you have proven to Fair Isaac that you can manage the firepower in your wallet you will be rewarded with increased latitude. Your score will still suffer if you make a late payment, and you will be penalized if you let your balance approach the limit, but not as much. In addition, you will be rewarded with a higher score as Fair Isaac becomes more confident in your staying power. When it comes to credit repair, time is your friend.

Reaching Your Credit Repair Goals

Do you want to optimize your credit score? Make your payments on time and watch those balances. The latest release of the FICO score model recognizes five balance-to-limit ratios: 20%, 40%, 60%, 80%, and 100%. The first two tiers, 20% and 40%, will increase your scores, 60% is neutral, 80% is bad, and 100% is terrible. There is also a special deadly over 100% category, which you can expect to obliterate your score. If your credit cards are under one year old your behavior is especially important. If you exercise caution, your scores will soar, and you will reach your credit repair goals.

Copyright 2007 James W. Kemish. All Content. All Rights Reserved.
About the Author
Jim Kemish, a nationally recognized credit repair and restoration expert, is the president of Sky Blue Credit, a leading credit repair service since 1989. Jim is also the president of Power Mortgage, a Florida mortgage company.
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