FICO scoring has never been more important, as banks are now taking the risk of lending money a bit more seriously. Let’s review, as best we can, how this score is determined and what you can do to improve your score.
By the way, the above is from a PBS special, “Secret History of the Credit Card.” Mrs. Taxpayer is still kidding me how a show with such a title can get my interest.
FICO formulas are still a bit of a secret, but the above is a good start. As I’ve read more about each of these criteria, I understand that ‘amounts owed’ are a ‘percent available credit used’ more than total dollars. So accepting a new card and instantly using the entire line may have a bit of an impact, but this is where unused credit on other cards actually helps bring down the total percent used. Of course, applying for too many cards in a short timespan also will impact your score.
Canceling cards can hurt you in two ways, raising the ‘percent credit used’, and reducing average age of accounts, so these are concerns. It may be a great feeling to cut up your paid off cards, but the better choice may be to check your score and act slowly. Keep the cards that have no annual fees, making a small charge now and then. If you plan to cancel the cards with fees, first calculate the total percent credit used, so you are sure that canceling those cards don’t impact your score. In the long run, paying one more annual fee may save you by avoiding the rate bump you may see from a lowered score.
If you are in dire straights, still make every minimum payment. Even if this means charging the same amount you just paid off. Missed payments will quickly impact the interest rates on the card involved, and soon raise the rates on all your open accounts.
There are those (such as Dave Ramsey) who will tell you to avoid all credit cards. This is nonsense. Graduate college, get a good job, save for a house, and you’ll find that without any credit history your options to get a mortgage will be limited despite the nice downpayment and low debt to income that new mortgage would cost you. Instead, find two no-fee (you’ll pay in full so the rate doesn’t much matter) cards, with a rebate or some perk, and use them for your routine purchases, even just gas if you wish. This will help build a real credit file and keep you from being financially invisible.
Last, check both your Credit Report as well as your credit score on a regular basis. Annual Credit Report will link you to your choice of reports from the three major credit reporting agencies for a free report once per year. By cycling through them, you can use a different one every 4 months, and catch errors or suspect activity a bit faster. Credit Karma is a great way to get a FICO score for free on a regular basis. Neither of these companies will ask you for payment or to sign up for a paid service as a condition of the free reports.