5/17/2012 2:15 PM ET|
6 rules for higher credit scores
They are among the most important numbers in your financial life, so you should try to keep them near their peak. Here are some good habits for doing just that.
Your credit scores are all-powerful numbers, capable of determining whether you get that new loan, car or apartment. Banks use your credit scores to determine your credit risk -- the higher the scores, the more appealing you look on paper, which can land you better interest rates on loans. Even job applicants can have their credit scores pulled by employers to gauge whether they'll be risky to hire.
And now it is arguably more important to have outstanding credit scores, because lenders have been forced to write off record levels of credit card debt and are getting pickier about which borrowers deserve the most-favorable terms. "Because of the recession, a lot of issuers are closely scrutinizing your credit score," says Bill Hardekopf, a credit expert from LowCards.com. A FICO score in the mid- to upper 700s is now considered a great credit score, according to Hardekopf. (Do you know your credit score range? Take this MSN Money quiz to get a free estimate.)
To land the best credit, consider these six ways to boost your score:
Check your credit report for errors
It may sound hard to believe, but Hardekopf says one way errors make their way onto your credit report is when credit reporting companies mix up your activities with those of someone who shares your name. Mistakes more commonly are the result of identity theft, though. If you're an ID theft victim, your credit report's payment history -- which Anthony Sprauve of FICO says accounts for 35% of your credit score -- likely will be chock-full of errors. So check to be sure you're actually the one responsible for what appears on your credit report.
At AnnualCreditReport.com, you can get a free copy of your credit report once a year from each of the three credit bureaus: Equifax, Experian and TransUnion. Beverly Harzog, Credit.com's credit expert, suggests spacing out your free copies so you receive one every four months and can check for identity theft or clerical errors throughout the year. If you find any errors, contact the credit reporting agency immediately to correct them.
Don't take out too many cards
To keep your credit scores high, limit the number of credit cards and other lines of credit you apply for. "Every time you apply for new credit, that application shows up on your credit report, so you'll shoot yourself in the foot if you apply for a number of credit cards hoping to get one," Hardekopf says.
The more cards you apply for, the more likely you are to be seen as a "credit seeker," a less-than-desirable label for someone who wants to maintain good credit. "You don't want to apply for credit that you don't need," adds Liz Weston, an MSN Money columnist and the author of "Your Credit Score: How to Improve the 3-Digit Number That Shapes Your Financial Future."
The less debt, the better
Many credit card users think they have to carry debt on their credit cards to have good credit scores, but Weston says that's not true. "There's this idea that there's a hard-and-fast line of how much credit you should be using," she says. "The reality is, the less credit you use, the better."
Ideally, you want to use less than 10% of your credit limit. If your total charges approach the limit of your available credit each month, Weston says you may still be hurting your credit scores even if you pay your bill in full. The balance that is reported to the credit bureaus is calculated from whatever day the bank chooses, so the reporting day might be one when you're close to your credit limit.
Don't wait to pay off your bill all at once
You don't have to wait until the first of the month, or whenever your credit card payment is due, to make payments. You can make smaller payments throughout the month to lower your debt quicker. Such payments help your credit scores because they lower your debt utilization ratio, which accounts for 30% of your credit score, according to Sprauve. That ratio is how much debt you're currently carrying on your credit cards divided by the total credit limit of all your credit cards. "You want to keep that at around a third, or 33%," Hardekopf recommends.
More credit can be good credit
Don't be afraid to ask for a credit line increase, which will improve your debt utilization ratio. "If you have a card you like a lot and use a lot, and are good at paying it off, ask for a credit line increase," says Weston.
Proceed with caution, though. "You should not call and ask unless you're a really good cardholder," warns Harzog. If you don't have a good credit history and ask for a credit increase, the bank might see you as a risk and reduce your limit instead. "It can backfire, so be careful," Harzog warns.
Keep your cards active
Simply having a credit card is not enough to maintain good credit scores. "It's important to use the card, even if you just buy lunch. That way, it will get reported," says Harzog. "You want to show that you can use credit responsibly." Don't close credit card accounts you're not using; that will bring your scores down. Keep the accounts active, so you have as much credit history established as possible. Says Sprauve of FICO: "The longer you have an account, the better."
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