Credit score tips that don't make sense

If you want to have high credit scores -- which can mean lower loan rates -- then you'll need to do some things that don't sound quite right at first.

By Stacy Johnson Sep 9, 2011 2:55PM

This post comes from Jason Steele at partner site Money Talks News.

You pay your bills on time, so you expect good credit scores, right? If only it were that simple.

In fact, your credit scores are determined by a number of different things, not just your payment history. Here's where it gets downright strange: Some of the ways to improve your credit don't even make financial sense:

Your scores improve when you have a lot of loans. According to FICO, the company that generates the most important of all the credit scores, 10% of your FICO scores are determined by the types of credit used. That means that someone with car loans, student loans and retail store accounts may actually have better scores than someone who has only one type of loan, and way better than someone with none. (Estimate your credit scores for free.)

More credit cards can mean better scores. Another 10% of your credit scores are determined, in part, by the amount of credit you use. While it makes sense that using less credit will help your scores, it's the other side of the equation -- the amount of credit you have -- that leads to this strange effect.

By opening up more than just one or two credit cards, you can increase your available credit and reduce the percentage of credit used. In the same way that having more credit cards reduces your overall credit usage rate, asking for a higher limit will also achieve the same effect.

You have to pay your credit card balance every day to stay out of debt. As someone who always pays his credit card balances on time and in full, I was astonished to see that my credit report showed that I owed money on each of my cards.

The simple explanation is that your balance on any given day is reported to the credit bureaus as a debt. I'll still pay my balance only on the due date, but I might pay earlier or avoid using credit cards if I was trying to raise my scores to get a home loan.

Don't cancel a credit card. An additional 15% of your credit scores is determined by the length of your credit history. One of the factors that's included in this calculation is the average age of your open accounts. While I'll always jump at one of the top credit card sign-up bonuses, I keep one card with no annual fee, year after year, just to improve this statistic.

Shop fast. It's wise to take your time and shop around for the lowest mortgage, car or student loan, right? Actually, FICO will count repeated inquiries for new credit as a single inquiry so long as they are all done within 30 days. Take longer to request competitive loan offers and you risk harming your credit scores by having too many inquiries. (Note: Inquiries result from a credit grantor, like a credit card or mortgage company, requesting your credit information. It's what happens after you apply for credit.)

While credit scores are determined by mysterious recipes that are never fully disclosed, FICO and others give us many clues about what ingredients are included. By understanding how the credit agencies view your finances, you can make the best decisions to maximize your credit scores.

More on Money Talks News and MSN Money:

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11Comments

Best

Sep 11, 2011 12:28PM

No mystery here: Credit scores are meaningless to consumers. They are designed to show banks whether a profit can be made from how you use your credit. If you have no outstanding debt banks can't make money from you, therefore your score is lower than someone who always carries a balance.

Adding insult to injury there's now a whole industry designed to make consumers purchase their credit scores, which are unlikely to be the scores the banks use anyway.

Previous replies

Joseph Price (Joseph Price)

Sep 12, 2011 4:30PM

The "credit companies" are just a rip off, nothing more. I pretty much just save for what I want and pay for it in cash. I have NO debt whatsoever. I like my life that way.

Home...paid in cash.

2 cars...paid in cash.

I have ONE credit card that I use only if I have an emergency..which I rarely use.

My extra monies all go into savings/TSP for my family and their future.

Basically, I've told the credit bureaus to go F themselves. I don't need them, I don't need their fake scores, and I don't need to buy their phony services either.

Any time you try to buy a car, house, get a loan, anything, you go in armed with your latest credit scores that you bought online...and then you get the excuse, "oh, we don't use those scores. we have other scores they send us that we use."

So if you paid your hard earned money for something, then as a consumer, the item you paid for should be the reflected and true item in an honest representation.

Congress has been coddling banks and credit companies while we suffer. Plain and simple.

BTW...I'm hoping and praying that BoA falls on its **** and dies like it should have years ago. I didn't get a bailout...neither should Corporate America. Rise and fall on your own merits.

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Tobytoe Max (Patience MM001)

Sep 13, 2011 9:34AM

I thought I was doing something good to increase my credit score when I paid off all my bills only to learn that I had not helped my scores at all but in fact had just lowered them. It's like being punished for doing the right thing. Creditors want all the money they can get out of us!

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Tobytoe Max (Patience MM001)

Sep 13, 2011 9:39AM

Banks use our money for loans and should pay us more than a few cents for using it!

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Methuss

Sep 13, 2011 5:55PM

FICO is a scam. It doesn't show your net worth or your character. All it shows is that you are willing to get in debt and stay in debt for a long time to get a stupid 3-digit number attached to your identity.

Think on this: I can have $30 million in the bank. No credit cards, no home loan, no car loans. But I couldn't rent an apartment and would get turned down for a car lease. I could buy the whole apartment complex or the car dealership, but I wouldn't get past the finance guy for something that small.

They may as well call it an "I am a financial slave" score.

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D S (2ndhull)

Sep 13, 2011 3:46PM

The Credit Bureaus tell me that my score (it's pretty good anyway) would improve if I would take out car and mortgage loans. I don't want to own a house right now and I pay cash for cars. Do they really think I'm going to do these things just to change an arbitrary score?

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Fed up Marylander

Sep 13, 2011 9:47AM

The whole thing is a scam. Too many cards with a low balance and the banks don't like it because you have too much available credit. Cancel the cards and now your debt ratio is too high. Looking to refi or modify a mortgage? One bank says you must be current before they can do anything. Another says you are current, we can only help if you are behind. Ask to modify and your score goes down because they think you are more likely to default and they will not lower your rate.

Too big to fail? How about the victims of their own poor decisions based on greed.

Previous replies

miranda1216

Sep 13, 2011 4:42PM

i buy everything with CASH..if i cant afford it, i dont buy it...period

Previous replies

realist1c

Sep 13, 2011 11:21AM

Actually, this article is outdated and very inaccurate. Many changes have recently (last 2 years) been implemented to negate some of these previously true inconsistencies. In fact, having 2 or 3 credit cards does look good on your credit report, but having more than 4 does not.

The author seems to have written this article based on old information.

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DALLAS CHEKED (dallasbc)

Dec 31, 2011 1:06AM

That is the Great American Grand Scheme of things: Keep the workingperson perpetually in hock!!!

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bushnot

Sep 13, 2011 11:55AM

credit scores meam nothing they just use it to get the highest rate they can out of you and you don't know how they are made up . No one knows the system. six years ago me and my wife work for the same company. Never was late on anything credit cards were coming faster than could get ride of. Then gas price went thru the roof and company folded. We were both out of good paying jobs, had to take what we could at half the pay. but before we could do anything get a job they were all over use,kept paying home and car on time. Cut everything else loose thru bankrupt. and are credit score never when under 700 which is good and they don't care. what your credit score is. I said why didn't ours drop to 400 or 500 if we are bad credit, we don't and you still hold it against us because you used the same laws to protect use as banks use to protect themselves only the works are being used. CUT THOSE CREDIT CARDS UP AND QUIT PLAYING THERE GAME. WE DON'T AND NEVER REALLY NEED CREDIT CARDS AND GET ALONE FIND.

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