9 Strategies for Improving Your Credit Rating

In his book Dirty Little Secrets, bestselling author and personal finance expert Jason R. Rich reveals the secrets of credit reports and ratings and explains what you can do to improve both. In this edited excerpt, the author outlines nine steps you can take to improve your credit and increase your credit scores.
Some of these strategies may seem like common sense; however, they represent solutions to the most common reasons why the typical person develops a less than perfect credit rating.
1. Pay your bills on time, every time. This strategy may seem extremely obvious. However, late payments are the most common piece of negative information that appears on people's credit reports and is often responsible for significant drops in their credit scores. When it comes to loans and credit cards, it's vital that you always make at least the minimum payments in a timely manner, each and every month, with no exceptions.
2. Keep your credit card balances low. One factor that's considered in the calculation of your credit scores is your credit card balances. Having a balance that represents 35 percent or more of your overall available credit limit on each card will actually hurt you, even if you make all of your payments on time and consistently pay more than the minimum due. Make timely monthly payments on the balance that are above the required monthly minimums.
If you have an average or better credit rating, consider asking your credit card issuers to increase your credit limits. However, do not utilize this extra credit by making more purchases. By increasing the amount of credit that's available on your credit cards while working to reduce your debt, you will improve your credit utilization and help to increase your credit scores.
3. Don't close unused accounts. One of the factors considered when calculating your credit scores is the length of time you've had credit established with each creditor. You're rewarded for having a positive, long-term history with each creditor, even if the account is inactive or not used. So avoid closing older and unused accounts. Instead, simply put those credit cards in a safe place and forget about them. Although you don't want to have too many open accounts, having five or six credit card accounts open, even though you only actually use two or three cards, can be beneficial.
4. Only apply for credit when needed, then shop for the best rates. Applying for a retail store card you're going to use once or twice, when you could just as easily use an existing credit card, might not be the best idea. Over the long term, if you maintain a balance on a store credit card, for example, the fees and interest charges are often much higher than a major credit card.
5. Correct inaccuracies on your credit reports, and make sure old information is removed. One of the fastest and easiest ways to quickly give your credit scores a boost is to carefully review all three of your credit reports and correct any erroneous or outdated information that's listed. If you spot incorrect information, you can initiate a dispute and potentially have it corrected or removed within 30 days.
6. Avoid too many hard inquiries. Every time you apply for a credit card or loan, a potential creditor/lender will make an inquiry with one or more of the credit reporting agencies (Experian, Equifax, or TransUnion). This inquiry information gets added to your credit report(s) and will typically remain listed for two years. If you have multiple inquiries in a short period of time, whether or not you get approved for the loan or credit you apply for, this can dramatically reduce your credit scores.
7. Avoid bankruptcy, if possible. In terms of your credit reports, credit rating, and credit scores, filing for bankruptcy is one of the absolute worst things you can do. If your credit scores haven't already plummeted as a result of late payments, missed payments, charge-offs, and defaults, when the bankruptcy is listed on your credit reports, you'll notice a large and immediate drop in your credit scores. Furthermore, that bankruptcy will continue to plague your credit reports for up to ten years and could keep you from getting approved for any type of loan or credit during that period.
8. Avoid consolidating balances onto one credit card. Unless you can save a fortune in interest charges and fees by consolidating balances onto one credit card, this strategy should be avoided. One reason is that maxing out any of your credit cards will detract from your credit scores, even if you make on-time payments. Assuming the interest rate calculations make sense, you're better off distributing your debt over several low-interest credit cards. An alternative is to pay off high-interest credit card balances using another type of debt consolidation loan or by refinancing your mortgage with a cash-out option.
9. Negotiate with your creditors or collection agencies. Contrary to popular belief, your creditors and lenders aren't your enemies. Your creditors are in business, and the nature of business dictates that they strive to earn a profit. When you don't pay your bills, this impacts a creditor's ability to do business and impacts its bottom line. Many creditors are willing to be understanding of difficult financial situations, especially if you openly communicate with them in a timely manner.
In other words, instead of skipping a handful of payments or defaulting on a loan, contact your creditors and lenders as soon as a problem arises and negotiate some form of resolution that's within your financial means. Depending on the level of your financial difficulties, your creditors may be willing to assist you.

Will Investors Ever Learn to Avoid Money-Losing Companies?

If you are an investor, you can be comfortable avoiding the 2013 crop of initial public stock offerings. After all, according to Jay Ritter, a professor at the University of Florida, Twitter, which lost $79 million in 2012 and is poised for a bigger 2013 loss, is hardly alone in losing money as it prepares to go public. Ritter’s statistics say that 68 percent of this year’s IPOs were also losing money.
Why are investors bidding on the shares? It certainly is not because the price of their stock is less than the current value of their future cash flows. After all, based on their history, there is no basis for concluding that these unprofitable companies will ever make money.
But that’s the beauty of the stock story for a money-losing company. If it were making a profit before its IPO, it would be harder to make outrageous forecasts about how much more money the company will make in the future.
But when a company is losing money, the sky’s the limit when it comes to predicting how bright its future will be.
Along with that ability to forecast a spectacularly profitable future is the fine functioning of one of finance’s most basic laws: momentum. That is -- a stock that is going up will rise more just because it is going up.
More specifically, when there is no real positive cash flows on which to value a stock, its price will rise because investors who do not own the shares will be afraid they are missing the party. So they decide to buy the shares. And if they are lucky, their buying will drive up the shares further, which will attract a new crop of fools -- I mean, investors.
28 tech companies have gone public so far in 2013, but this year’s post-IPO performance has been the best since the peak of the dot-com bubble of the 1990s. On average, those 28 stocks have gone up 39 percent in the first month after they went public.
Although this year’s crop has been largely made up of money losers, Ritter argues that over a longer period of time, the companies that go public with a profit do better in the stock market. His analysis of profitable tech companies that went public between 1990 and 2011 found that their stock prices rose 55 percent in the first three years of trading, while their money-losing brethren enjoyed only a 22 percent rise during those three years.
Is there another bubble brewing? Maybe -- but we are nowhere near the point of explosion. We will know we are there when we get into a taxi and the driver is giving us hot tips on the latest IPO that he heard from the hedge fund honcho he just dropped off on Wall Street.
In the meantime, Ritter’s statistics suggest that you would be better off avoiding the money-losing IPOs and stick to companies that take the trouble to make a profit before they try to sell you their shares for the first time.
Unfortunately, the hapless investor is left with a very fundamental problem. There is no reliable basis on which to explain why stocks go up and down. You're probably better off just investing in a stock index fund with low expenses than gambling on an individual stock.
That said, if you’re running a startup that has at least $100 million in revenues and is growing over 30 percent a year, odds are good that you can hire several investment banks and they will be happy to take your company public -- whether it makes a profit or not

A Common Personal Finance Mistake New 'Treps Make

Starting a business affects your life in many ways outside of work, in particular the way you manage your personal finances. One of the biggest mistakes new entrepreneurs make is not keeping their personal and business finances separate.
"They move money back and forth and it is very important to keep their records separate," says Edward Wacks, a business financial advisor based in Plantation, Fla. This commingling of finances, Wacks says, can have some damaging implications for your business down the road.
For example, if you are paying business expenses with personal funds or vice versa, it becomes challenging from an accounting standpoint to know what your profits or revenues are for your business, says Wacks. That makes filing your business taxes a headache.
Also, without a clear division in your finances, your personal assets are less protected if your business is sued or you take out a business loan and can't pay it back.
"Many entrepreneurs are great salespeople, but they are not as good with the inside" of a business, the metaphorical financial guts of a company, says Wacks.
Here are three tips for protecting your personal finances as a business owner:
1. Keep separate bank accounts. Taking this one step to separate business from personal will make the biggest difference, especially at tax time when you document your business' profits and losses. While this might seem obvious, Wacks says this is a common mistake he has seen startups make.
2. Think like you have business partners, even if you don't. To prevent yourself from getting lax about keeping your finances separate, think as though you have business partners, says Wacks. You wouldn't expect your business partners to pay for your groceries or the recent fill-up at the gas station: that will have to come out of your personal piggy bank.
3. Don't mix credit card purchases. When it comes time to pull out the plastic, keep one credit card strictly for business expenses and a separate one for personal purchases. Otherwise, trying to parse the business charges from personal ones on your monthly statement after the fact can get confusing.

How to Respond to a Letter From the IRS? Breathe.

If you’re in business, it’s bound to happen to you at some point. We’re talking about a crisp piece of mail from the IRS.
While letters like these can come at any time throughout the year -- and throughout your career -- they tend to tick up right about now. And though many mailings can be harmless, for the rookie entrepreneur they're no less frightening. They’re also not the easiest things to read and have been known to leave recipients scratching their heads. Still, you must do something.
Ignoring mail from the taxman is never a smart move -- he’s got all the time in the world. So below are a few tips you can implement immediately should you ever experience the joy of having to open a letter from the IRS:
First, take a deep breath
Receiving a letter from the IRS isn’t the end of the world, so take a deep breath. Actually, take two. Good. Now read the letter from start to finish. Don’t jump around as the IRS tends to lay things out in an orderly, albeit jargon-filled, fashion. Then read the letter again. Your objective at this stage is to understand as much of the situation as possible and identify what’s being asked of you and what your options are. And it can’t hurt to gather potentially useful documentation such as old returns.
Call
Every piece of mail from the IRS comes with a phone number. Assuming the letter you’ve received doesn’t paint the whole picture for you, calling this number will be well worth it as talking to a person not only helps you understand the nuances of the situation but there’s comfort in knowing that a human being with a name and a face at the IRS is there to help you figure things out.
Bonus tip: note the operating hours and avoid calling first thing in the morning or during lunch when the lines are busiest. Bonus, bonus tip: maybe now’s the time to invest in a hands-free headset because you might find yourself on hold for some serious lengths of time.
Consult some help
If you have an accountant, you should immediately send them a copy of the letter. (If you don’t have an accountant, now might be the time to get to know one.) Send a copy and request some time to discuss. The meter will most likely be running, but it will be time and money well spent as your accountant has the experience and insight you’ll need. Some accountants will offer to handle the inquiry for you (at a cost) and interact directly with the IRS or they will further explain the situation and get you started on what actions you need to take. Either way, think of an accountant as an ally who knows how to deal with the IRS and has likely seen your situation before.
Keep good records and adhere to deadlines
Of course, the best way to prepare for that inevitable letter from the IRS is to keep meticulous records and adhere to deadlines. Keep digital copies of all tax payments. If you have an accountant, check in with her on a monthly basis so that nothing gets lost in the shuffle. Know when quarterly estimated tax payments are due.
Ultimately, it comes down to being prepared. A letter from the IRS is anxiety-inducing enough as it is -- having to wade through mountains of disorganized documentation is only going to compound your panic.
And don’t forget those deep breaths.

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.