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.

Payment history: 35%, Amounts owed: 30%, Length of credit history: 15%, New credit: 10%, Types of credit used: 10%

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:

  1. 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!
  2. 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!
  3. 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.
  4. 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.
  5. 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.
  6. 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!

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joshuat
joshuat
13 years ago

Remember, the FICO score is a “I love to borrow money” score. If you pay for everything in cash and don’t borrow money for any reason, your score will be poor or nonexistent, depending on the last time you had a debt.

It is not actually required to get a mortgage for a house. Find a mortgage company that does manual underwriting, and they’ll look at your bigger financial picture, rather than just the FICO score.

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

If you live in Canada, note that you can obtain your credit reports for free. However, you must make the request in writing, using a form. If you go to the Equifax or Transunion websites, note that they do what they can to trick you into paying for your report. You want the forms for your FREE credit report.

I also closed an account I wasn’t using. I’d had it since I was 18, but I wasn’t using it and saw no point to keeping it. Duh.

kick_push
kick_push
13 years ago

closing unused accounts –

i think this could hurt your score since the debt to credit available ratio changes after you cancel an account or two

as for myself.. i had about 8 credit cards when i first started building my credit.. i didn’t use any of them except for one or two.. and i always paid them on time.. not sure why i had so many.. but after a while i decided to keep 2 of the cards that had i had the longest history with (over 3 years).. and cancelled the rest

MY CREDIT SCORE DID NOT CHANGE

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

Hmmm. I don’t actually know that closing the account hurt my score. I didn’t have any debt to start with.

Aimee
Aimee
13 years ago

You know what drives me crazy? Recently some credit card companies will close your account if you don’t use it for a certain period of time. This is bad for your credit score, and yet there isn’t much you can do about it other than know the time limit and make sure you use the card now and then. For example, my longest history card was from Mervyn’s. I had it for over 10 years, which was a great amount of history for my score. But, I don’t use it. So, the other day when we needed clothes I went… Read more »

J.D.
J.D.
13 years ago

MY CREDIT SCORE DID NOT CHANGE

Kick_push brings up an important point. When the CNN article mentions that an expert “estimates” how much various actions will hurt your score, that’s exactly what he’s doing: estimating. The truth is nobody knows for sure how how FICO scores are calculated. They’re able to make educated guesses, but they’re still guesses.

Latro
Latro
13 years ago

Interesting and thanks for the link to the free credit report. It looks like all my accounts are in good standing.

It did list one account as having a $6k limit but the limit is actually on $500… I even called the card company to check. I’ll need to clear that up.

Shaz
Shaz
13 years ago

Wow. This post is right on time. It wasn’t until January of this year that I gave any attention to my credit score (no house, no car, no plans to purchase either in the near future). I got a credit report from Experian in Jan. of this year, and just out of curiosity paid a little extra to get, what I thought, was my FICO score. Instead, it was my “VantageScore.” A product developed by the “big three” instituations to score risk that is more consistent since the number is based on information from all three agencies, not just one.… Read more »

Nathan
Nathan
13 years ago

More important than “care and feeding” is making sure what’s reported to the credit agencies is actually correct. More to the point, making sure what future lenders will see when they actually request the score. Case in point, I have a score of 740+ with both Experian and Equifax, but my TransUnion score is literally 250 lower that my highest score. I’ve been working for 2 months getting two complete misprints on the report taken off, but it’s been a huge hassle. It’s not enough to just do the right things anymore, you apparently need to make sure they aren’t… Read more »

M. Edwards C.
M. Edwards C.
13 years ago

Rather than closing accounts, does it help or hurt your score to ask the cc company to reduce your credit limit down to say a $250 limit or something? (so that it doesn’t appear as though you have too much open revolving credit)

Dying to know.

Rich Schmidt
Rich Schmidt
13 years ago

If you’re trying to get out of debt and want to limit your credit… couldn’t you just cut up the credit cards but not close the account? Remove the temptation to use the card, but let the credit bureaus see you as having credit lines available to you.

Wouldn’t that work?

J.D.
J.D.
13 years ago

This is actually a counter-intuitive one. Since one of the elements of your credit score is the percentage of your available credit that you’re utilizing, asking for lower credit limits is likely to hurt your score rather than help it. On the other hand, this is another case where each person has to make a decision: what’s more important, having a good credit score or not running the risk of debt?

Moneymonk
Moneymonk
13 years ago

@ joshuat

FICO is “I love debt” score. I don’t know why these cc companies purposely gives people 5K and 10K limits that only teases the consumer to accumulate debt. They want you to rack up as much as you can so they can have you trapped.

I say use debit that way you do not have to worry about a limit or dinging your score.

It is sad that you have to finance something constantly and keep paying it to keep a good score.

Wesley
Wesley
13 years ago

Thanks for the post and the link! I new about the ads for free credit reports, but never knew how that worked. This was very informational, thanks again!

Wayne
Wayne
13 years ago

As joshuat and Moneymonk have stated, FICO score is not a measure of wealth. It’s a measure of debt, and it’s typically used to leverage yourself into greater debt. One of the greatest opponents of FICO and Vantage is Dave Ramsey, who implores his readers and listeners to become totally debt free and not wrap themselves up in an arbitrary score. I second that.

mahalie
mahalie
13 years ago

I recently obtained my FICO and the analysis said I was docked for having too many open accounts. I somehow ended up with two open Macy’s cards that I hadn’t seen or used for well over 10 years, among others that I knew I’d attempted to close before.

There’s a balance to be had. My strategy is to keep the credit card account I’ve had open the longest open along with a few that have the highest credit line (to help the debt/credit ratio) and close others I’m not using.

Stephen Snyder
Stephen Snyder
13 years ago

In response to Shaz’s question about the Vantage score…

The three national credit reporting agencies have grown tired of building credit scores that they can’t sell to lenders because lenders use the industry-standard FICO score.

To summarize…there isn’t a new score for consumers…just a joint marketing campaign to promote one to lenders.

If it doesn’t say “FICO” it isn’t worth crap.

Ed
Ed
13 years ago

I had a WAMU card that gives me a free update on my FICO score and it says one of the things “hurting” my score is not having a long credit history.

But one of my credit cards that I have with my credit union, that is open but no balance, is almost 11 years old. How can that not be a long credit history?

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

Well, perhaps you’re not showing any recent use of the credit available to you.

anne
anne
13 years ago

Just a note on department store cards, from my parents’ experience – they were told that having too many of them hurt their credit score. So they cancelled them (some quite old) and sure enough saw their credit score go up.

YMMV.

JohnK
JohnK
13 years ago

The only way “too much credit” hurts your score, assuming you don’t owe anything on any of your credit accounts, is if the percentage of credit compared to your income is too high. If you only make $40,000 a year, but have $200,000 in available credit, then others are afraid that you might tap that credit and go belly up. It this case, carefully closing some accounts may help your score. But generally, what hurts your score most is: Late or default on payments, high balance to credit limit ratios, recent credit acceptance, and to some extent, the number of… Read more »

Gaming the Credit System
Gaming the Credit System
13 years ago

The “expert” opion that “for each percentage point of debt that you use, your FICO score will drop by one point” is a pretty poor estimate. For starters, the debt-to-limit ratio contributes about 150 points of your FICO score. As I wrote in one of the first posts on my blog, this is NOT a linear thing. I don’t have hard and fast rules, but if I were to estimate, I’d say that this is what it looks like: 0-25%: 0-10 points 25-50%: 10-50 points 50-75%: 50-100 points 75-100%: 100-150 points In other words, the higher the percentage, the more… Read more »

Lisa
Lisa
13 years ago

The reason codes listed under your credit score are the top factors explaining why you do not have a perfect score, even if you have never had any negative marks on your credit report.Even people who have 800+ scores will have these reason codes listed under their scores.

Roy
Roy
13 years ago

Credit scoring, scored as to one who is willing to borrow and pay it back. Been there, done that. Much better to have a cash cushion then a credit card.

BxCapricorn
BxCapricorn
13 years ago

In America, you can also get a “Free Annual Credit Report”, it’s just a little trickier because there are some sites pretend that they are that free site, when in fact they try to re-direct you to paid services. To order your free credit report, the three nationwide consumer reporting companies (Equifax, Experian and Trans Union) have set up one website, a toll-free telephone number and a mailing address for you to use. The toll free number is (877) 322-8228 and the website is http://www.annualcreditreport.com. You can also complete the Annual Credit Report Request Form (available at http://www.ftc.gov/credit) and send… Read more »

beanspants1
beanspants1
13 years ago

The FICO score in my opinion is one of the slimiest things to come out of the whole credit industry. At least credit cards, which everyone sees as the devil here, have the guts to put exactly what they think of you right on your bill. And if you don’t agree with what they think of you, you can close the card and eventually pay it off, and never deal with them again. FICO, on the other hand, you have to pay to get your score, and they arbitarilly move the formula around all the time, because it’s really not… Read more »

Greg C.
Greg C.
13 years ago

There are many different “score cards.” Any particular action will not affect everyone the same. Closing a card ( especially a card with age and low utilization) may likely lower score, but not always. Just as an inquiry does not have a point value. I have read things claiming each inquiry will cost “2/3/5/6/etc points” but this really varies. On some files a couple inquiries may cause a drop of several points, while others might not change at all. Just like with card closings and many other things. I would also note that having a high FICO does not require… Read more »

Greg C.
Greg C.
13 years ago

Also, income has NOTHING to do with credit scoring. It might affect manual underwriting though.

In other words, your score is independent of income but a manual reviewer might not like something about your credit ( high credit limits) and ask you to close something down. Though it is rare.

Megan
Megan
13 years ago

I have a few things on my credit report that are not errors so much as miscommunications. I know how shady that sounds – basically, I was monitoring accounts online during a time when I wasn’t receiving mail, and the online statements didn’t jibe with what I actually owed. Will it hurt my credit score if I contest this and if the credit company proves a better case than I? The original failure to pay is already on there.

Blogging with Desi Baba
Blogging with Desi Baba
13 years ago

Aren’t long years of good credit standing helps in the high credit score? Because I know that some banks took me in consideration because I missed paying my bills about 1-4 times within a 4 year period out of all of my credit cards.

ANDREA
ANDREA
13 years ago

can anyone tell me how i can check and monitor all three credit agencies on line.
ia m in Canada an all the ones that I have found are in the usa.

thanks.

Gabe
Gabe
13 years ago

FICO is a rip.. I have a 2500.00 limit and never used more than 500.00 on it. I pay it off every month. My credit score recently dropped 40 points from 710 to 670 for NO apparent reason. The balance was ZERO and I make sure to use the card each month. The reasons or excuses they gave were lame since I follow those automatically. I was going to work my way up to 800 but at this rate I get penalyzed for NOTHING!! I don’t know what to do now…there has to be a way to get around this… Read more »

Pete
Pete
13 years ago

In June 2007 my credit score was 732 and in july it dropped 51 points…I can’t figure it out how in the world it could of dropped so much…i pay every month on time but with the exception that i carried a high balance. So carrying a high balance will drop ur score that much???? Please let me noe

Kay @ Don't Mess With Taxes
Kay @ Don't Mess With Taxes
13 years ago

[…]J.D. over at Get Rich Slowly has a good post on care and feeding of your credit score. And […]

m
m
12 years ago

Don’t know if anyone will read this so many months after publication, but if so . . . Does anyone know which is a better move: applying for a 0% balance transfer card (with no fee) and getting the ding on my credit score, or just losing out on the finance charges for my credit card debt but keeping my credit score where it is by not applying for a new card? I’m not sure how much that one application might affect my credit, and we will likely be looking for a new place to rent, and thus I do… Read more »

Greg C.
Greg C.
12 years ago

m, I really think it depends on your ability to obtain a 0% deal. If you are pretty confident you can obtain one with 1 inquiry, the interest saved could well be worth an inquiry. The ding will probably be temporary, and as long as you keep your cards open, your score will probably increase as your utilization % decreases, and you would have less cards maxed out. credit score impact is relative to your specific situation. Without knowing, it’s all speculation. The amount an inquiry and new credit will help or hurt depends. For most people utilization is a… Read more »

m
m
12 years ago

Thanks Greg, your advice was very thorough and helpful. Thanks so much!

john
john
12 years ago

I AM WORRIED ABOUT DEBTS. I HAVE A GOOD SCORE: AVERAGE OF 729, BUT I WANT TO CLOSE THE CARD WITH THE HIGHEST INTEREST(11.99apr) AND I HAVE ONLY HAD IT FOR ONE YEAR. WILL MY SCORE GO DOWN?
I HAVE ANOTHER CARD THAT HAD A LIMIT OF 2000, WENT UP TO 6000, AND AS I APPROACHED THE 2000 LINE, THEY LOWERED IT TO 2400, WILL IT NEGATIVELY AFFECT MY SCORE?

PS.- ALL OF THIS INFO CONTRADICTS ITSELF, SO IT DID NOT HELP MUCH

Scott
Scott
10 years ago

There’s truly just one answer to that: debt-to-credit ratio. You shouldn’t hold on to the flawed notion that paying your debts on time and in full is the only great determining factor to increasing your credit score; this is not entirely true. You must understand your debt-to-credit ratio. This is your ratio of debt against total available credit you’ve been proffered in your revolving accounts. For instance, if you have revolving account of $20,000 and you have a $5,000 debt, that’s a 25% debt-to-credit ratio. Now the scene can change drastically if incur a debt of say $25,000. Remember that… Read more »

Alex
Alex
7 years ago

This article was awesome!! Thank you. Being fairly new to the credit repair and credit score arena I am constantly trying to gather as much information as possible to try and keep myself headed in the right general direction. Spending some time on this post has actually given me a lot of great points to think about. In my recent research I have also been able to find some pretty useful information related to this topic when I Googled the credit locker university. Thanks again!

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