The bulk of things you can do are the obvious: Pay your bills on time, keep your balances low. The mix is not nearly as important. But it is important to have at least one credit card or revolving account.— Rod Griffin, director of public education, Experian
It's
common knowledge that a high credit score is the key to low-interest
loans and increased purchasing power. But what makes a credit score go
up? Counter to conventional wisdom, people who keep their credit card
balances near zero and always pay their bills on time might not have
the highest possible credit score. Many factors are used to calculate
the score beyond the main checks on timely paying of bills and having
no maxed-out lines of credit. Some of the methods for helping a score
go up are surprising.
Variety Counts
Not
all credit types are the same, and credit scores may be calculated in
different ways depending on the purpose. The best way to ensure a high
score across the board is to have a well-rounded credit report.
Look
through your credit report to see if you have any gaps that are easy to
plug. While mortgages and car loans aren't something that may — or
should — be added simply for the sake of a credit score, different
types of credit cards may be considered.
Having
a credit card provides credit rating agencies a snapshot of how you
spend money and choose to pay off your debts. Unlike installment loans,
which offer no choice on how much to pay or when to make payments, the
flexibility of credit cards is an important window into how you handle
financial responsibility.
"The bulk of things you can do are the obvious," said Rod Griffin,
director of public education at the credit rating company Experian.
"Pay your bills on time, keep your balances low. The mix is not nearly
as important. But it is important to have at least one credit card or
revolving account."
"With a
charge card," Griffin said, "you have to pay the amount in full each
month, but there's still an insight into how much you choose to spend
that an installment loan doesn't provide."
Responsible use of a credit or charge card is better for your credit score than not using revolving credit at all.
Keep Accounts Open
Intuitively,
a large number of open accounts that aren't being used seems like a bad
thing for a credit score. However, credit history is a fairly important
factor in credit scores.
Credit
scoring formulas react negatively to sudden flurries of activity. This
goes for closing accounts as well as opening them.
You
should consider closing only those accounts that are not among the four
oldest accounts on your report; those that charge an annual fee; those
that are the same type as several other open accounts; or accounts that
you don't plan to use in the next year. Even with these truly "extra"
accounts, close only one at a time, waiting 30 to 60 days between
account closings, so that each month's credit report registers and
absorbs one account closure at a time.
Remember,
it's not the number of accounts you have open, but how you use them.
Having several long-term, lightly used accounts with on-time payment
history does not harm your credit score and might help it. Reasons to
close accounts include avoidance of fees and the temptation to spend
beyond your means.
Spread Out New Credit Requests
As
your credit score increases, offers flood in for better loans and
credit cards, and it can be tempting to convert all your
higher-interest debt at once. A slow but steady conversion, however,
may prevent a drop in your credit score.
Credit
score formulas are created to catch any behavior that might make a new
lender nervous. One of those behaviors is a sudden rush of newly opened
accounts, since this signals a change that might represent a break from
how that account holder behaved in the past. Even a conscientious bill
payer with a long history of responsible credit use may be penalized
for rushing into too many new, attractive offers at once.
By
all means, take advantage of those low interest rates; you've earned
them with your solid credit. But transfer balances one at a time and
wait 30 to 60 days between opening new accounts. This avoids triggering
the "new credit" component of the score, which may represent up to 10
percent of the total score.
Stability Is a Plus
Because
credit scores are all about stability, having an ever-changing roster
of addresses, phone numbers and employers can actually hamper your
score.
For those who know
they will continue to move frequently, a post office box can be a good
idea for establishing stability with creditors. Use the box address
whenever signing up for a new line of credit or opening a new bank
account. If you opt for online payments and statements — which nearly
every creditor and bank now offer — you'll rarely even need to check
the box. Some mailbox services also offer mail forwarding for a small
fee.
Similarly, use a cell
phone number instead of a home number on credit and bank applications.
The reason is that cell phone numbers are portable from one location to
another and even from carrier to carrier, while landlines require a new
number each time you set up service in a new area code. Neither of
these tricks creates a significant boost in your score, but having one
phone number and address for seven to 10 years does reflect stability.
Bankruptcy Can Help
Many
debt forgiveness firms and bankruptcy attorneys tout the rehabilitation
your credit score gets from a successfully discharged Chapter 7 or
Chapter 11 personal bankruptcy. This is true — but only gradually, and
only after an initial drop.
"The
purpose of bankruptcy is not to get rid of the debts you owe in order
to get more debts as soon as possible," said Experian's Griffin. For
that reason, credit scores become somewhat irrelevant in the wake of a
bankruptcy.
Griffin added:
"The number doesn’t matter outside the context of the credit report."
Because a credit report carries the bankruptcy notice for seven years,
any credit score you carry will be tainted by that information.
However, for consumers struggling with extremely low credit scores
because of overwhelming debt ratios and an inability to pay back bills
on time, bankruptcy is one solid path to slowly increasing that score.
But doesn't the number go up for people with low credit scores?
"Typically, it will go from abysmal to very poor," Griffin said. "You can get credit, but the question to ask is: What kind?"
The
key to a solid score in the long run is not taking advantage of the
loan offers that come flooding in immediately following a bankruptcy.
Because federal law allows individuals to receive bankruptcy protection
only once every seven years, some lenders see recently bankrupt
consumers as targets for high-interest, high-fee loans that can't be
ducked for any reason. Staying out of revolving debt in the wake of a
bankruptcy is the only surefire key to emerge at the other end with a
chance for a significantly improved credit score.
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