Wednesday, February 16, 2011

Optimizing Your Credit Score

Besides getting negative credit items deleted from your credit report, there are several things you can do to optimize your credit score. Even if you already have good credit, making a few changes can help make the difference between a 720 credit score and a 760 credit score and help you get approved for the lowest rates offered.

The first thing to consider is that the length of your credit history comprises 15% of your credit score. Obtain credit early, as long as you can responsibly manage it. If your parents didn't help you get a credit card while you were still in high school, or if you didn't obtain a credit card or car loan as soon as you turned 18, you might think there's no way to travel back in time. Wrong! If you have a parent, grandparent or spouse who is willing to add you as an authorized user to a card in good standing that has been open longer than any credit you currently have, their credit history will be added to your report.

It's important to remember that the card must be in good standing (now and in the past) or adding it will have a negative impact on your report. If someone is leery about adding you to their account, they can always cut up your card as soon as it arrives. My husband is an authorized user on three of my cards, but doesn't have any of them in his possession.

Not every company reports authorized users to the credit reporting agencies. Most do, but USBank for example doesn't. In my case, my oldest credit card was a USBank card. Once my husband's credit had bounced back I applied to add a joint user to the card rather than an authorized user. This means that he is as responsible for the bill as I am, not just allowed to make charges to the account. This way it actually showed up on his reports.

Besides establishing a long credit history, your score is also impacted by the average age of your accounts. Opening new accounts all over the place will lower your average credit age. Be thoughtful when you apply for credit. I wish I could open cards all the time for the bonuses that often come with a new account, but because of the hit my credit score would take it isn't worth it to me. I stick to opening bank accounts instead of credit cards for the incentives.

Opening a lot of new accounts also means that your score will take a hit because of inquiries. Every time you apply for credit, a new inquiry appears on your report. Sometimes this will be on just one, sometimes it will be on all three. Inquiries make up 10% of your credit score, and it is best to have one or two inquiries at most. Multiple inquiries can also make it seem to creditors like you're scrambling for money, and can result in a denied application for credit.

One of the biggest factors that impacts your score is the utilization of your credit cards. If your card is maxed out it will have a very bad impact on your credit report - even if you're making all of your payments on time. It is best to show a total utilization of about 1% (for some reason this is better than 0% - I guess because if you're showing zero you're not demonstrating an ability to actually use credit) but anything in the 10-20% range is pretty good. The lower you are, the better.

Add up the total balance on all of your cards and divide that by the credit limits of all of your cards. This will give you your utilization percentage. If you have multiple cards, it's best to show use on only one or two of them, and for that utilization to also be low. Even if your total util is only 1%, if you still have one maxed out card your credit score will take a hit.

Keep in mind that different cards report credit limits at different times, so even if you're paying off your card in full every month you might find that your credit report still shows balances. I can only speak to my experience but here's the way my cards report:

  • USBank - Reports the credit balance on the last day of the month. Even though my payment isn't due til the 3rd or 4th, I pay it on the last day of the month so that my util will be low.
  • FIA Fidelity - FIA is a division of Bank of America, and reports the same as them. They report the balance on your statement. If you want to avoid a balance showing up when using a card like this, you will need to pay the card off right before your statement cuts (so about a month before the actual due date).
  • American Express - AMEX is a tricky beast. They report your statement balance from the previous month just after your statement cuts. So, if my statement balance in January was $500, when I get my statement in February for $200 my reports will update with a balance of $500. If you want your American Express card to show a zero balance, you'll have to plan ahead.
Note: Even though my FIA Fidelity card is an American Express, it follows FIA's reporting guidelines. Only cards obtained directly from American Express should follow AMEX's guidelines.

Although my credit has always been very good, I have used utilization tricks to maximize my score. By making sure my utilization was at 1% on only one card, my score went from about 730 to about 760 and I got the very best rate possible when I purchased my Prius.

By adding some credit history and higher utilization to my husband's credit, I pulled his scores from around 650 to just under 700 - a huge difference from where he started at 470!

1 comment:

  1. This article is surely a big help to people who want to improve their credit score! In addition to your pointers, another way to optimize your credit score is to pay your bills on time. By doing so, your credit rating gets better over time. Payment history accounts comprise 35 % of your total credit score. Although this may be a long shot, it can still increase your credit score and help you establish a better payment plan.


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