Updated: 7/6/2011 3:53 PM ET|
5 new rules for solid credit scores
Remember those long-standing guidelines like closing old credit card accounts, never maxing out cards and asking for lower interest rates? Well, you can forget them now.
The rules that credit card companies have to live by changed dramatically with the enactment of new regulations in 2010. Now some of the rules for consumers striving to maintain good credit are changing, too.
For the most part, cardholders would still do well to pay on time, keep their balances low and refrain from applying for too many credit cards at once. But some of the old guidelines may not always hold up, as credit card companies continue to adapt to the new environment and look for ways to run their for-profit businesses.
Case in point: Many issuers introduced annual or inactivity fees in the weeks leading to or immediately after the Credit Card Accountability, Responsibility and Disclosure Act went into effect. "Now folks have to decide: Do they want this card badly enough to pay the fee, or do they close it," says Barry Paperno, the consumer-operations manager at Fair Isaac, the company that developed FICO credit scoring.
It's a question of more than just losing a credit line. Closing a credit card can have a big impact on your credit scores. That is, unless you do some groundwork in advance.
With the help of some easy -- if often counterintuitive -- steps, you can improve and retain healthy credit scores even in today's credit environment. Here are five:
1. Open more credit cards
For years, experts warned that opening new credit cards hurts your credit score -- not to mention enabling you to run up huge debts. That's still true: The length of your credit history and new credit make up 15% and 10%, respectively, of FICO scores. But with credit issuers lowering credit limits left and right these days, having too few credit cards puts a much more important credit-score component at risk: credit utilization, or how much of your available credit you're using. Credit utilization makes up 30% of your score.
"More cards mean more available credit and more options if an issuer decides they don't like you," says John Ulzheimer, the president for educational services at Credit.com. Generally, having four or five credit cards is better than having just one or two, he says.
Expanding your credit card portfolio isn't something you should do tomorrow; it's a strategy to be executed over time. If you have just two cards, now is the time to open a third. But wait at least six months to a year before applying for a fourth card.
2. Max out (some of) your credit cards
A quirk of credit score math makes it advantageous to max out certain cards. How? It's a matter of what the issuer tells the credit bureaus.
Some types of cards don't report credit limits to the credit bureaus. They include all charge cards from American Express and some high-end credit cards that are marketed as having no preset spending limit, such Visa Signature and MasterCard World. (These cards have credit limits, but cardholders can exceed them and must pay off the excess in full on the next bill.)
When the FICO scoring system comes across such an account, it will either bypass it for the purpose of calculating credit utilization or substitute the credit limit value with that of the highest balance on record for the account. The most current FICO scores from TransUnion and Equifax bypass charge cards, according to Paperno. So as far as those two bureaus are concerned, your charge card spending will not affect your utilization.
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