Thanks to Saving to Invest for including this post in this week’s roundup of articles at Personal Finance Carnival #184.
As a follow-up to my post about checking your credit, here are eight things you might not know about what affects your credit rating:
1. Your credit score is always changing. The three credit bureaus get monthly updates on what new accounts you’ve opened, paid off, or missed payments on. New information is weighted more heavily than old.
2. Maxing out a card is the second fastest way to trash your score (the first is missing payments), even if you’re paying your minimums on time. Lenders care about how much credit you’re using in proportion to the amount of credit you have available. Reaching your limit is a warning sign for default. Keep this in mind the next time you’re tempted to rack up more debt to earn rewards (is anyone even bothering with flier miles anymore?). Also, beware of anyone offering you a card with the limit of the price of a purchase you’re about to make.
3. Lenders like old accounts that show you can be trusted. Opening a bunch of new accounts will hurt your score. Each represents a new risk.
4. Because lenders like old accounts, you should never* close an account. (*Caveats for shopaholics and those with so many that it’s impossible to track all of them.) Good history, as well as a chunk of your available credit, eventually disappears from your record when you close an account. Charge something small on each account at least quarterly, and pay it off, to keep the account active.
5. If you must close accounts, choose the newest and least valuable kinds (i.e., a department store card). Pick a time span of a year or so when you are not planning major purchases like a car or house so that your score can recover. Experts like Liz Pulliam Weston say they wouldn’t close anything right now, given the current credit climate.
6. You have an individual score, but it will rise and fall if your accounts are coupled with another. This can become particularly painful in divorce, because any credit history you had evaporates if the account is in your spouse’s name. “After my divorce, I ended up 100 points lower even though I was the same person paying my bills the same way,” says Monika Nagy, a financial coach based in Florida. “I had to cancel my cards in my husband’s name, and when you lose that history, it’s very substantial.”
7. You can’t hurt your score by checking your credit reports yourself.
8. Beware of debt consolidators. Okay, that might be a no-brainer given some of their terrible TV ads, but they can actually damage your score in addition to taking your money by challenging everything in sight on your credit report. That can make old information current enough to ping your score again. You can clean up your credit on your own by adopting good habits. But if you’re in real trouble, check out the National Foundation for Credit Counseling.
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Tags: Credit bureau · Credit card · Credit history · Credit score8 Comments
Great tips, Sara, and very timely considering the current credit crisis.
I noticed that you recently included my blog, Millionaire Mommy Next Door, in your blogroll – thank you!!! I appreciate your interest and support. You may not know, however, that my original blogspot website (the one you linked to) was hacked and disabled in October. Therefore, I had to move to a new domain. Would you mind updating your blogroll with my new URL address? It’s http://www.millionairemommynextdoor.com
You can read about what happened to my original blog here: http://millionairemommynextdoor.com/2008/10/hacked-moved/ (I just dropped the “.blogspot” part).
Thank you and happy holidays,
Jen
I get monthly prints out of my credit score, not necessarily to know my credit score but to check activity of my address and my name, I have in the past had someone try to steal my identity and make money off taking loans out in my name, which really damaged my credit score.
I think it’s creepy that credit companies are constantly trolling our financial activity. I know credit cards hurt small businesses and have been trying to pay CASH for groceries and other items (though I never seem to have enough. So I pay as much as I can in cash and then put the rest on my card). Also, we bought our house with an owner-financed loan, MUCH better for everyone involved than using the bank. I’d like to recommend to your readers that they look into that.
This is great information. I wish I’d read it a year ago when we were buying a house. We do have good credit, but mostly because we pay things on time–and not because we’ve tried to influence our credit score. It’s good to understand how banks figure it out.
That’s interesting, Jennifer. An owner-financed loan is a new one to me. I was definitely a little creeped out by the whole thing. I know there’s a bill stalled in the legislature that would give us more rights with regard to credit card practices; hopefully that will go somewhere again in the new year.
Thanks Jen, I’ll fix it.
Sara, great tips here. Thanks!
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