Keep Score of New Rules About Credit

The advent of credit scoring has changed some of the rules for maintaining and improving your credit report.

Most lenders now use a three-digit number, created from a patented formula, to determine your credit-worthiness. The most commonly used formula was created by a firm called Fair, Isaac & Co., and the resulting number is known as a FICO score.

Your credit score is not listed on your credit report, but a lender may tell you what it is. Most people have a FICO score somewhere between 400 and 800. If your score is 660 or higher, you have good credit. Between 620 and 660, you’re considered slightly less desirable and you may have to pay more for a loan or work harder to convince the lender that you’re a good risk. Below 620 is generally considered marginal or poor credit.

What exactly determines a FICO score is considered a trade secret, but some details are known. Applying for a lot of credit in a short period of time can hurt your credit score, as can maxing out the credit you do have.

A common piece of advice used to be that when you were getting ready to apply for a loan, you should consolidate your debt onto one credit card and cancel the rest. Unfortunately, the FICO system seems to prefer lower balances on several cards rather than a high balance on one card. It wants to see some “headroom” between the debt you’re carrying and your credit limit.

At the same time, having too many open lines of credit can hurt your score. The solution seems to be canceling the cards you don’t need well in advance of when you need to apply for a major loan or mortgage.

Surfing for good credit card rates and moving your balance around isn’t always a good idea. The more credit inquiries you initiate by applying for credit, the worse it looks on your credit report.

Tax liens, collections and bankruptcies really hurt your credit score. If you haven’t paid the Internal Revenue Service or the state’s Franchise Tax Board, those tax agencies can slap a lien on your house or your car, which shows up as a black mark on your credit report. Collections and tax liens stay on your credit report for seven years. A bankruptcy stays on your credit report for 10 years.

What helps your credit? First, it’s the old Catch-22: You need to have credit to get good credit. If you have absolutely no credit history, you can start with a secured credit card or a department store card, which tend to be easier to get.

Paying on time is extremely important. Ignore the old advice about waiting until the last minute to pay your credit card bills so that you can earn maximum interest on your money. Paying earlier helps to avoid late fees and late notices on your credit report.

Credit experts recommend consumers check their credit reports at least once a year to catch possible fraud or mistakes. The three major credit bureaus are Experian at (800) 682-7654, Trans Union at (800) 916-8800 and Equifax at (800) 685-1111.

For more information on credit, visit Bank Rate Monitor at https://www.bankrate.com.