Keeping Up with a Good Credit Rating

Getting your good credit rating was a gradual process. It took years of responsible debt management to finally put you in the low-cost credit club.

Lenders and credit card issuers are delighted to receive a credit application from you, and you’re very likely to get the best deal they offer. Once your credit score reaches the mid-700s, you’re in the clear. Right? Pretty much; most card issuers’ best rates and offers are available to those with a credit score of about 720-750, and up. So now that you’re here, how do you make sure to keep it that way?

First of all, it’s important to not only know your credit score, but to understand that everybody’s credit score is based on their own unique situation. Something that may be bad for one person’s credit score may be good for another’s, such as opening a new account. Too many accounts with lots of available credit can make creditors leery about someone, but an additional account may help boost creditor confidence in a person with few accounts. Also, some factors may be good or bad for everybody, but in varying degrees. A person with years of on-time payments on many accounts will suffer less credit score damage from a single late payment than someone who only has two accounts with one late payment.

Keep in mind that a credit score is not a fixed number. Your credit score can change monthly, or even daily on occasion. Many factors are taken into consideration when the credit bureaus calculate your credit score. Your credit score can be affected simply by when you pay your bills, and when the creditor reports your account activity to the credit bureaus. This timing factor can hurt your credit score temporarily, even if you have full control of your debts.

Let’s just say that you typically use most of the available credit on one of your credit cards every month, but you always pay it all off by the due date. If the card issuer reports your balance to the credit bureau before it’s paid each month, it will look like you are using a lot of your available credit, maybe more than you can afford. High balances raise a red flag with creditors, and can lower your credit score. They don’t give you credit for paying off the balance at a later date. If you don’t have many credit cards, it can look even worse; your credit-utilization ratio is based on the total balances compared to the total credit limits with all your credit cards. It’s best for your credit score to use less than 30% of the available credit at any given time.

You can fix this problem a few ways. You can request an increase in your card’s credit limit. This will bring down your credit-utilization ratio, if you continue to spend the same way after the increase. You can also open a new credit card account, which will give the same effect of more available credit. The last thing you can try is to contact your card issuer. Find out when they report your account each month, and then pay off the balance in enough time to have the account balance reported to the credit bureau as zero.

In your quest for more available credit, be careful not to overdo it. Too many inquiries on your credit report can bring down your credit score, and they stay on your report for two years. If you’re looking for a new credit card, keep your credit applications within a few weeks of each other, and then it will usually only count as one inquiry. The credit scoring system makes an allowance for that, since they know you are likely to be just shopping around for the best deal. Also, your current card issuers may pull your credit report if you’re requesting a credit limit increase, so keep those requests within a short time frame, too.

In addition to all the new inquiries, you must be careful not to open too many new accounts within a short period of time. Let’s say that you found a few cards you’re interested in, and you applied for them all to see who gives you the best interest rate. Well, what a surprise, you were approved for all of them! With all these new credit cards, your credit score can go down considerably. The shorter your credit history, the more this can hurt your credit score; even one new account can bring down the score of someone who is fairly new in the credit market. If you have a long credit history with many accounts, the damage won’t be so severe. Creditors like to see how you handle your accounts over the long haul, so the damage is only temporary if you continue to pay your bills on time.

On the other hand, not using credit can also prevent your credit score from being the best it can be. Let’s say you have lots of credit cards, but rarely use them. You’re committed to being responsible about debt, and pay cash whenever possible. You count on your credit cards to get you through in case of a major emergency, and that’s the only time you’ll use them. Though you are making a smart decision to handle your finances this way, it makes it harder to show how responsible you’ll be if you were to actually use credit. If there’s no charges and no payments, your credit card issuer can’t report to the credit bureau that you pay your debts on time.

All it takes is one charge on your credit card every month. When you pay your balance on time, the card issuer will report that the account was paid as agreed. Your score improves dramatically when you can show two years of on time payments, but even six months is a good start. The more accounts you have with good payment histories, the better for your credit score. Rotate your cards and use them each month. With more credit cards comes more payment dates to remember, so set up an automatic bill pay through your bank. Or, go to your credit card’s website right after using your card, and pay off the balance immediately. Either way, you can take care of the credit card debt without forgetting to make your payment on time.

If you have a long credit history, you’ve probably had some of your credit cards for many years. You may feel like you should reduce the number of credit cards in your wallet, especially if you don’t use them often. While it may be a good idea to get rid of cards that charge an annual fee when you have some that don’t, be careful about closing too many of your older accounts. Just like new accounts do some temporary damage, older accounts help beef up your credit score. Consider closing your newer accounts before you close out the accounts that have been with you for years.

Your credit score also takes into consideration the types of accounts you have. Generally, it’s better to have a variety of loans at your disposal. A mix of credit cards, car loans, and home mortgages are better for your score than nothing but credit cards. While this is something to be aware of, it’s probably not a good idea to rush prematurely into buying a home just for the sake of a credit score. Also, most people finance a car simply because they do not have the cash to pay in full, so they must pay the finance charges that come along with the loan. Getting a car loan when you can pay in cash is a very expensive way to increase a credit score, so it’s probably not a good idea.

Some types of accounts are not so good for your score. Loans from finance companies, that generally cater to people with less than perfect credit are in a gray area. They may affect some credit scores negatively if there are too many of these types of accounts. Even if it has a positive effect on some one’s credit score, it won’t be as beneficial as a main-stream credit account. These loans are usually very expensive personal lines-of-credit, generally 21% APR or more. People who must resort to these types of loans are often thought of to be in the high-risk category. In-store financing, such as for appliances or furniture may be purchased with these types of loans. Also, items that are sold in the home, like water softeners or vacuums are often paid for through a finance company.

The worst thing to find out about your credit is that it’s damaged due to fraudulent accounts. It’s very insulting to see that someone claimed to be you to open new accounts in your good name. Protect yourself from identity theft, and check on your credit report at least annually. You are entitled to a free report once a year, from all three major credit reporting agencies, at www.annualcreditreport.com. Dispute any fraudulent accounts with both the reporting creditor and the credit bureau. Report the fraud to your local police, and get a police report to aid you in your dispute. Finally, report the fraud to the Federal Trade Commission atwww.ftc.gov/idtheft, and give as much detail as possible.

There’s really no need to make frequent credit score-watching a major concern, unless you’ll soon be in the market for a new home, a car, or other major purchase. Then, it makes perfect sense to do all you can to get that score as high as possible; being qualified for the best financing can save big bucks. It’s a good idea to start working to improve your credit at least a year before a major loan purchase, so you have time to clear up any problems involving fraud or inaccuracies. Avoid opening any new accounts or closing old accounts during the year before your major purchase, so that all your accounts can show a long payment history. Keep your account balances low, especially around the time the lender pulls your credit report.

While keeping a good credit rating is important for the best deals on every type of credit and loan, it’s not the all-important concern regarding your finances. Your bottom-line is the most important concern. Staying on top of your debt, and living within your means will ensure that you reach your financial goals. Save and invest a little more, and spend a little less. Your credit score is one of many factors that paint your overall financial picture. It’s possible that doing something good for you credit score can be a bad decision for your financial situation. Do what you know is best for your life; you must consider your income, your current expenses, your discipline, and your level of responsibility. Be wise in your use of credit, and your good credit rating will follow.