Dan Marchiando's Mortgage News Blog

Strategies for Maximizing Credit Scores

February 5th, 2009 5:07 PM by Dan Marchiando


Last month I covered what goes into a credit score. In this issue I'll discuss some strategies that will help keep your scores as high as possible.

Check Your Credit Often!

One of the most important parts of managing our credit and credit scores is to monitor our credit on a regular basis. Statistics show that errors occur in a number of credit reports. And with identity theft on the rise, it's recommended that you check your credit report regularly for signs of fraudulent activity. As consumers we need to keep an eye on our credit reports to catch and have these errors corrected. It can take 2-3 months to resolve some errors, so a good practice is to check credit reports regularly, and to check months before actually applying for new credit.

Fortunately that can be done fairly easily—and for free—by visiting one central source website: www.annualcreditreport.com Thanks to the 2004 FACT Act, we can pull our credit report for free from each of the three Credit Bureaus once each year. There is no need to pay for a credit report, or to pay for "credit monitoring" services, if you take the time to manually check your credit on a regular basis. Don't be fooled by advertisements for imposter sites that promise "free" credit reports, as the free reports are only available if you signup and purchase other services like "Credit Monitoring." Keep in mind that the 2004 law only requires the three bureaus to provide free credit reports. It doesn't require them to provide free credit scores. You may choose to purchase your score through annualcreditreport.com —but it is not required—to obtain the free credit report.

A good strategy is to visit the central www.annualcreditreport.com three times each year. Each time you visit, pull just one of your three credit reports. Since most of our credit information is the same with all three credit bureaus, this strategy will allow you to monitor the majority of your credit over the course of the year. When you visit the site, you will be asked what state you are in, and then you will be asked for your name, birth date, social security number, and address. Next you will be asked which of the three credit reports you want to order. If this is your first time, then choose Equifax. I'll explain why in a moment. Next you will be given an opportunity to purchase your FICO credit score for $7.95. On the right of this page you will also be offered ongoing monthly credit monitoring for $7.95 per month, which I feel is unnecessary for most people. If you are curious about your score, or if you are considering applying for a mortgage soon, then a good strategy might be to purchase your one-time score. I don't recommend purchasing the scores that Experian and TransUnion sell to consumers, because they are not the industry-standard FICO score. Experian sells a PLUS score which ranges from 330 to 830, and TransUnion sells their VantageScore which uses a letter grade plus a number that ranges from 501 to 990. Because they both use a different number scale than FICO's 300 to 850 scale, they are difficult to compare to the FICO score consumers have become used to, making them confusing.In spite of rumors to the contrary, consumers may pull their own credit report through this website without fear of those inquiries lowering their credit score. So sit down and pull your Equifax report today and I'll remind you to pull your Experian report in 4 months, and your TransUnion report in 8 months. People without computer access can request their credit report by phone by calling a toll free number, (877) 322-8228.

Some Useful Tips:

If you've accidentally run past the 20-day grace period on your credit card bill, or the 15 day grace on your home mortgage, go ahead and make the payment ASAP anyways—you will still get dinged the late fee—but at least you won't end up with a 30-day late on your report. Lending Solutions Consulting estimates that a single 30-day late will lower a credit score 60 points. The most trouble-free strategy is to set up automatic payment with the bank, so you'll never be late, and never have to pay a late fee. Automatic payments are vital for consumers who travel a lot and aren't always around to make the payment on time. Keep in mind that once a late payment is recorded, later payment of the account will not remove the blemish. Also, paying off and closing an account that was previously late will not make the blemish go away either (although it may make you feel better).

Try to keep the overall balance owed on all credit cards as low as possible. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The balance on your last statement is generally the amount that will show in your credit report. Having a large number of accounts with balances can also lower a score. Some studies suggest that the ideal number of accounts with balances is perhaps 2 to 3 credit cards, say 1 car loan, and 1 or 2 mortgages. High utilization of individual credit limits can seriously lower scores. This is sometimes referred to as being “maxed out.” Utilization is computed by taking the statement balance and dividing it by the credit limit. So a credit card with a $1,000 balance and a $10,000 credit limit would be at 10% utilization. Although FairIssac is vague about where utilization starts hurting scores, some studies suggest that scores drop once credit utilization gets over 30 or 40%. If you have a credit card with a fairly low credit limit, asking the issuer to raise the limit may actually improve your score. In spite of rumors to the contrary, having a lot of available open credit does not hurt credit scores. It is only when those accounts have balances—especially higher balances—that these accounts may lower a credit score.

The score considers both the age of your oldest account, and the Average Account Age. Resist closing older credit cards, even if you no longer use them—doing so can actually lower your score. Even if you are offered a new account with an attractive introductory interest rate, it is usually best to keep the old account open with a zero balance.

Opening more than a few new accounts within a short period of time will lower credit scores. A good strategy would be to not take on new accounts unnecessarily, and to limit the number of new accounts you take on, say in a given year.

Scores are higher for people who have experience using different types of credit, like credit cards, installment loans such as car and student loans, and mortgages, so don't avoid using credit, just use it carefully. Try to use a variety of different types of credit; some credit cards, an occassional car loan, and a mortgage.

Keep in mind that there is a lot of misinformation out there about what helps and hurts credit scores, so make sure you get your advice from a trusted source like this website. Good information is also available on the website of the Federal Trade Commission under tabs for Consumer Protection, and Consumer Information. Start at www.ftc.gov. FairIssac Co. also has free information on their website at www.myfico.com.

Thanks for your interest,


Posted in:General
Posted by Dan Marchiando on February 5th, 2009 5:07 PM