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.
Tips & Warnings
- Always read the fine print before paying any company to see your credit score. Many companies automatically enroll customers in a recurring fee-based program that may or may not be what the customer was looking for. A free credit report — with no credit score included — is available once a year.
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