Proper care and feeding of your credit score
Your credit score is like a pet monster under the bed. Feed it and care for it, and it will do your bidding. But if you neglect it, it will turn against you. But beware! Taking good care of it can bring you dangerously close to its sharp teeth.
Your credit score determines the types of credit you can obtain, and how much you will be charged in interest. Last year I described the anatomy of a credit score, explaining that it's a single number derived from various pieces of information contained in your credit report.
CNNMoney has a presentation that describes six situations that can to turn your credit score from a friendly monster into a raging beast. If you want to keep the beast happy, avoid:
- Using too much credit — One expert estimates that your credit score declines one point for each percentage of your total credit that you utilize. (In other words, if you have $2,000 debt on $10,000 total credit, your credit score is docked 20 points.) Don't carry debt!
- Making late payments — The same expert estimates that an average late payment can subtract 60 points from your score. Even residual delinquencies can hurt your score. Pay on time!
- Limiting your credit — In order to have a credit score, you have to use credit. If you avoid certain types of credit, your score will be lower. Real-life example: I do not have a personal credit card. My credit score is docked because of this, and I know it.
- Getting too much credit too soon — The afore-mentioned expert believes that each time you apply for credit, your score gets dinged five points. The credit monster gets a belly-ache when you feed it too much at once; it prefers small portions.
- Closing unused accounts — Because of the way credit scores are calculated, closing unused credit accounts actually hurts your rating. The longer you've had an account, the more weight it carries. It soothes the credit monster when you leave accounts open, unused. Real-life example: Before I knew this, I closed a bunch of unused credit card accounts. My credit score dropped.
- Failing to keep tabs on your credit report — Even if you do everything right, you can take a credit hit from identity theft and other forms of fraud. Even simple errors can hurt your score. It is imperative that you check your credit report regularly.
As with caring for any monster, keeping your credit score happy requires some choices that may seem a little dangerous. Limiting your credit might make the most sense from a rational standpoint, especially if you're trying to get out of debt, but it makes your credit monster cranky. It's hungry for more. You should do what works for you. In my case, I opt not to carry a personal credit card despite the ding to my score. This is best for my situation.
Remember to obtain your free credit report regularly. The Fair Credit Reporting Act requires each of the nationwide consumer reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months.
The easiest way to check your credit is through AnnualCreditReport.com, an official, government-approved site. If you'd like, you can obtain reports from all three credit reporting agencies at once. Or, you can stagger your requests, possibly requesting one report every four months from a different agency.
Be good to your credit and it will be good to you!