Some of this information may seem duplicative, but I consider it reinforcement. It’s all good.
Working on the Amounts You Owe
Keep your credit card and other revolving credit balances low. High outstanding debt can affect your score. Maxing out your credit cards could lower your average score by as much as 70 points. Keeping all of your credit card balances below the 50% threshold of available credit will raise your credit score. Keeping all of those balances below the 25% threshold will improve your credit score even more. You should take action at least 60 days in advance of a large loan request to allow time for the information to get reported. Don’t try to improve your credit score three or four days before you apply for a big loan.
Don’t have any credit cards maxed out. One item that has significant negative consequences on your credit score is using all of your available credit. If you want a high credit score, you simply must not use all of the available credit on any of your credit cards. Even worse than reaching your credit limit on any card is actually going over your limit. Not only will you likely incur over-limit fees, you will lower your credit score. Keep those balances low for a high credit score.
Don’t close old, paid-off accounts. It used to be common for financial planners to tell people to close accounts they weren’t using. But when you consider that one-third of your score is based on how much of the credit available to you that you’re actually using, you may want to keep them open. Cutting up credit cards automatically will decrease the amount of credit you have available. It’s better to stick the cards in a drawer until your score is back on track.
If you close your oldest accounts, it can actually shorten the length of your reported credit history and make you seem less creditworthy.
Perhaps you can afford not to care too much about the effect of closing an account. If you don’t use your cards much and your score is already high, the damage caused by shutting down more recent unused accounts will be minimal and may be well worth the peace of mind.
If you do carry balances or charge a lot, however, leave all your old accounts open, especially if you’re about to apply for new credit.
Keep all this in mind the next time a department store clerk offers you a 10% discount for signing up for a new card. Each new account can put a small ding on your credit score and offer a new opportunity for credit thieves. Since closing accounts can hurt, it’s better to apply only for credit you really need.
Closing an account doesn’t make it go away. A closed account will still show up on your credit report and may be factored into your score.
One of the determining factors that affects your credit score is the length of time you’ve had each account. While you might not want to continue to pay an annual fee on a credit card that you opened when you were in college, the annual fee might be worth the resulting benefits to your credit score from having a credit account that is over a decade old. The older an account is, the more it will boost your credit score (provided, of course, that the account has a good payment history).
Keep accounts with balances open. You might be tempted to close out credit card accounts that have become delinquent. Before you close any account, make sure it won’t negatively affect your credit.
Don’t be afraid of credit counseling. If you’re overloaded with high-interest debt and are in danger of falling behind on your payments – or you already have – consider working with a nonprofit agency such as Consumer Credit Counseling Services to set up a debt repayment plan. These services can negotiate lower interest rates and help you pay off your bills within a few years. You can locate a credit-counseling agency through the National Foundation for Credit Counseling.
Contrary to what you might have heard, credit counseling probably won’t hurt your credit score. It used to, but about three years ago Fair Isaac discovered that people in debt-repayment plans were no more likely to default or go bankrupt than other consumers. Today, the FICO score ignores any references in a credit report to credit counseling or debt management programs.
Those references to credit counseling, by the way, are typically removed from a credit report after a consumer has successfully completed a repayment plan. That means there is no lasting reminder on your credit history.
Don’t confuse legitimate, nonprofit credit counseling services with fly-by-night outfits or so-called debt settlement firms. Debt settlement will hurt your credit score, since you’re paying less than you owe, and fly-by-night firms can disappear with your payments, making your credit even worse.
Stay out of bankruptcy if you can. Bankruptcy is much worse than delinquencies, loans or collections. Its impact, however, depends on your credit before you filed.
Bankruptcy can knock 200 or more points off the score of someone with otherwise good credit. People with multiple delinquencies or collections on their reports will see less of a decline because their scores are low to begin with. Either way, recovering from a bankruptcy can be tough. Once a score is pushed below 620, which bankruptcy inevitably does, credit becomes scarce and far more expensive.
High-interest lenders love recent bankruptcies because they know consumers aren’t allowed to file again for another six years, which is plenty of time to squeeze out high-rate payments.
Mainstream lenders, however, generally reject consumers with bankruptcies on their records, and bankruptcies are reported for up to ten years.
Knowing your credit score, and the potential impact of a bankruptcy, might help you steel your resolve to pay off your bills and improve your credit situation.
Once you know the impact on your score, get good, objective advice before filing for bankruptcy. Attorneys may be overly eager for you to file, while consumer credit counselors may be overly eager that you not. Books such as Robin Leonard’s “Money Troubles: Legal Strategies to Cope with Your Debts” offer a more balanced view of the risks and benefits of bankruptcy.
Ask for an increase in your credit lines. One of the determining factors used to compute your credit score is the ratio of outstanding credit to available credit. The lower this ratio, the more it will help to raise your credit score. For this reason, you should ask your current credit cards providers to raise your credit limit on each card. Be careful, however, to ask only those companies that will grant your request without running a new credit report on you. Many credit card companies will automatically grant a request to raise your credit limit every six months provided there were no late payments in the preceding six-month period. Remember, though, frequent credit inquiries will lower your credit score, so ask first if a request for a higher credit limit will require a new credit check.
Plenty to think about, isn’t it? In the next article, you will find some ideas for cleaning up your older credit history and building a great credit score.