Five guidelines for making the most out of your all-important credit score

Tips to Improve Your Credit Score

By now, we hope everyone knows how important it is to have a healthy credit report that is accurate and up to date. Uncertain economic times only increase the need for each of us to make sure our credit reports look as good as possible and don't contain errors.

Just as important as the credit history contained in your report is the credit score derived from it. While the report will give lenders, employers, landlords, etc. an overview of the person with whom they are doing business, the credit score gives them a single, solid data point with which to make decisions that may have a deep impact on your financial future.
Individuals who are trying to build or restore their credit score should bear in mind the following tips:

1. Closing accounts hurts your score. Instead of closing old accounts, just pay it off. In particular, the longer you've had an account, the better, so you should keep the oldest credit account you have active even if you don't use it.

Beware, though, of creditors who close accounts that aren't used frequently; you'll get the same negative blow to your credit score as if you'd closed it yourself. In some cases, the creditor will stop reporting an unused account to your credit report, and you'll lose the positive impact it has on your score. In those cases, you will need to use the card once every six months to keep it active and ensure that it is helping your credit score.

2. You should check your report frequently, but not necessarily your score. Checking your report frequently is a good idea, as it's the best way to uncover identity theft, and doing so sooner can limit the amount of damage a thief can do to your credit rating. You'll also want to check your report to make sure it's correct, and if you request a correction, you should check again in 30 days to make sure the credit bureau fixed everything properly.
There's less of a need to check your credit score frequently. The score is important when it comes to specific loans or applications for credit, so the best time to order a copy of your credit score is six months before you apply for a major loan. Then, if your score isn't where you'd like it to be or your report is inaccurate, you have time to make corrections and improve the score.

The place to get your credit report is https://www.annualcreditreport.com, NOT freecreditreport.com. The latter isn't free at all if you fail to cancel timely their promotional offers. And when it comes to ordering your credit score, you should go to www.myfico.com. The FICO® Score is the one you want, not a "VantageScore" or other scoring product that isn't used by very many creditors and doesn't have the proven track record of FICO®. Unfortunately, when you get your free credit report at https://www.annualcreditreport.com the bureaus will try to sell you their proprietary credit scores, skip that option and get your score directly from FICO® when you need it.

3. Don't worry so much about inquiries. You may still hear advice to limit the number of applications for credit you make; traditionally your score would go down if you had too many "inquiries" (creditors checking your credit report as a result of your application for credit). But recently FICO® changed their scoring mechanism to be more forgiving in most circumstances. That includes inquiries. While it's true that too many inquiries will impact your score, that impact is not as serious as it used to be. FICO® recognizes that people need to shop around to get the best rate when applying for loans, so they don't lower your score as much when you have several inquiries in close succession. Generally speaking you still shouldn't apply for too much credit, but if you're comparison shopping to get the best rate on a loan, don't worry about the resulting inquiries on your credit report. Inquiries for a mortgage or auto loans are bundled within designated timeframes and treated as only one inquiry to your credit score calculation.

4. Spread your debt around. If you're close to your credit limit on any one credit card or line of credit, your score will be hurt. Suppose you have three credit cards with $1000 limits, and one is maxed out while the other two have no balances. Credit-wise, you're better off carrying a $400 balance on all three cards than keeping one of them close to the max. Even though you actually owe $200 more in the latter scenario, your score will be better.

Another way you should spread the debt around is by diversifying. Credit cards are convenient and can help you establish credit, but mortgage and auto loans are much better for generating a good credit score. Having different sources of credit is much better for your credit score than having a credit report that is dominated by credit card debt.

5. Focus on the big picture. The recent changes FICO® made to their scoring method take in the whole credit report more than focusing on individual items. A 120-day late payment will still be a disaster for your score, but having one 30-day late payment on a credit report full of on time payments won't be as bad. They've also discounted the impact of collection items under $100, so small debts that fall through the cracks won't devastate you like they used to.

To get the best possible score, focus on a healthy debt mix that includes different kinds of credit and loans. Don't make any late payments, keep your balances moderate, and above all, be patient. You can't improve your score over night, but with time, good borrowing behavior will have a dramatic impact on your creditworthiness.

Springboard offers our "Consumer Guide to Good Credit" as a free.pdf download from our web site. This comprehensive guide will show you how to establish and maintain good credit, and guide you through the process of restoring the accuracy and integrity of your credit report.

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