How to Score Big with Your Credit

What Is a Credit Score and How Can You Help Yours Reach New Heights?

As soon as you open your first credit card, you begin establishing your credit history. It all gets put together into a credit score — basically a statistical summary of your credit report. The number is determined by whether you pay your bills on time, how indebted you are in relation to your income and how much credit is available to you. Almost everyone with whom you apply for credit will use it to determine if you are a good credit risk. It will follow you wherever you go.

If you protect your credit score from the moment you start to build one, it could be your best friend. Many financial institutions reward individuals who have excellent credit with lower rates.

The five main factors evaluated in calculating your credit score are: your payment history, how much you owe, length of credit history, new debt and/or new accounts and your “mix” of credit.

The best way to improve your credit score, or build a good one from the beginning, is to follow the basics of good money management:

• Don’t abuse credit.
• Never borrow more than 50% (better yet, 30%) of the money available to you.
• Don’t carry high balances on revolving credit.
• Pay your bills on time.

In addition, consider these other tips to keep your credit report — and your credit score — healthy:

• Don’t have more credit available than you need. Even people who have an untarnished credit history may run into trouble if they have too much credit available. You may be surprised to find out how much credit you have access to at any given time. For example, if you bought furniture on a 12-month-no-interest special, you may have a generous outstanding line of credit with the finance company. Too much available credit could allow you to get in debt quickly — and this risk may lower your score. Close excessive accounts you won’t use and be sure to inform the credit bureaus.

• Keep long-standing accounts. When determining which accounts to close, consider how long you have had each card. Don’t cancel credit cards that you’ve had for a long time. By keeping these accounts, you maintain a healthy average account age. If you have missed payments, closing the account doesn’t make the record disappear.

• Keep credit inquiries to a minimum. Too many credit inquiries in a short period of time sends up a red flag to some companies and could lower your credit score. Apply for the credit cards you are sure you will use, but resist the urge to apply for every department store card that offers a one-time 10% discount for applying. Opening a lot of new accounts too rapidly will also lower your average account age.

• Do your shopping for a given auto or mortgage loan within a focused period of time. It is okay to shop around, but do your shopping in one 14-day period. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquires occur.

• Be careful from whom you borrow. If you borrow from a finance company, it could lower your score. Finance companies are perceived as last-resort lenders. If you think you’ve never borrowed from a finance company, think carefully. If you took advantage of a 12-month-nointerest loan at a furniture store, it was probably made through a finance company.

• Have credit cards, but manage them responsibly. In general, having credit cards and installment loans (and making timely payments) will raise your score. People with no credit cards, for example, tend to be higher risks than people who have managed credit cards responsibly.

Source: Some information for this article was taken from “Four Steps to Spotless Credit” by Jean Chatzky in the February 2006 issue of Money Magazine.