Credit score grading criteria seems as unpredictable as the Ohio weather. You know you want a high score, but knowing how to reach the credit score gold medal is not very straightforward. And if you thought you had it figured out, Fair Isaac Corporation (FICO) has decided to change the scoring model come spring. (Read this Featured Article for more information.) Even with all the speculation, there are basic ways to build a good credit score in 2008.
Check your credit reports. If you’re a reader of Your Money NOW, you might have heard this before. And we can’t say it enough. Your score comes from the credit reports of the three credit bureaus. If your report has a single error, your credit score may suffer. You may order your free report at www.annualcreditreport.com. Be sure to report errors to the credit bureau where you found the error.
Don’t be late. If you skip just one payment, your credit score can fall significantly. If you anticipate making a late payment, call the lender to discuss your situation. You may be able to make arrangements and avoid the lender reporting the late payment. Also, if you are the forgetful type, consider setting up automatic or recurring payments for all your credit accounts.
Watch your balances. Try not to use more than 30 percent of your credit limit on any line of credit at any time during the month. Using even less than that is even better. If you use credit cards to track your expenses or have another reason for carrying a high balance, consider making two payments a month to keep the balance lower.
Don’t close accounts. A high proportion of closed accounts can hurt you even more with the new FICO formula. Open accounts in good standing, on the other hand, will give you more points.
Keep your accounts active. Lenders might close inactive accounts, thereby hurting your score. Yet, more than that, the new FICO formula wants evidence that you are responsibly managing credit. So having too many inactive accounts could hurt you. Maintaining an inactive account is as simple as charging something (even a very low-priced item) every month on the card and paying the balance off in full.
Joint accounts work and authorized users don’t. Authorized users will no longer benefit from the main credit holder’s good credit. Joint account holders, however, will. Yet, this also brings more risk. Joint accounts mean you are jointly responsible for the debt.
Look into installment loans. Revolving accounts such as credit cards and lines of credit are just one of type of credit. The other is an installment loan. These are typically fixed payments such as auto loans and mortgages. The FICO score rewards users who successfully manage both types of loans. This doesn’t mean get a loan you don’t need. If you’ve paid off an installment loan, your credit score will still reflect the success in a higher score for up to 10 years.
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