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Factors that Raise or Lower Your Credit Score

There are not a specific set of steps you can take to improve your credit score because there are so many different variables that make up one's credit score.  To illustrate this, consider the following:

  • Opening up several new credit card accounts will raise one person's credit score while lowering another person's score.  Why?  Because one person might have an insufficient credit history and adding additional accounts will increase his score.  Another person might have a very long credit history, say 22 years, and opening up new accounts will lower her average account age, which will in turn lower her credit score.

  • Closing credit card accounts can either raise or lower your credit score.  There is no way you can predict if closing an account will raise or lower your score because you might have too many credit cards compared with the number of other types of loans you have open or you might have too few. 

A good rule of thumb is to use common sense when trying to improve your credit score.  When deciding to take a specific action, try to stay within the mainstream.  For example, the average American has seven open credit card accounts.  If you have 22 credit card accounts and a low credit score, you might boost your score by officially closing some of those accounts.  However, you may harm your score if closing old credit card accounts would (1) lower the average account age of all your open accounts; and (2) affect your debt-to-credit limit ratio if you carry big balances on your credit cards.

Generally, the most important two actions you can take to improve your credit score are to (1) pay your bills on time each month before the due date in order to keep late payment notations off of your credit report; and (2) pay down debt and do not accumulate anymore debt.

Delinquencies and collection accounts.  Late payments and defaults harm your credit score more than any other factor.  Just one 30-day late payment on your credit report lowers your credit score by as much as 35 points. Sixty and ninety day late payments do even more damage.  If you start paying your debts on time today, you can significantly increase your credit score in six months.   This means sending in your payment at least a week before the due date. 

Judgments, liens, bankruptcies.  Nothing lowers a credit score more than a bankruptcy notation on a credit report.  Filing for bankruptcy can knock as much as 200 points off your credit score if your credit score is high and about 100 points if it is already low.  You may not be able to get financing until you settle the judgment or lien.  If you do get financing, it will be at a very high interest rate that can add $50 to the average monthly car payment and literally hundreds more to the average monthly mortgage payment, particularly if you live in an area where housing prices are outrageously high.

Maxing out credit cards.  It is better to carry small balances on two credit cards than it is to max out one credit card.  Try not to use up more than 25% of your available credit on any one credit card in order to improve your credit score.  Of course, having too few credit cards or having too many credit cards can also lower your credit score -- it depends on your particular credit mix.  How many credit cards should you have?  There is not a set number of credit card accounts that will maximize your credit score.  The average American has seven open credit card accounts, so you probably shouldn't have more than seven open credit card accounts.  Try to use your credit cards on a regular basis to keep your creditors reporting your excellent payment history to the credit bureaus; however, pay off all or most of the card every month. 

Account mix. If you have too much of one type of debt, e.g., lots of credit cards but no loans or three ar loans but no credit cards, your credit score can suffer.  Lenders want to now how you handle different types of debt.  You can also be penalized if you open too many new accounts within the last year.    For example, if you apply for a mortgage loan and the lender sees on your credit report that you have applied for five credit cards in the last year, the lender can find this alarming.

Too many inquiries.  There is a section on your credit report that lists all the companies that have pulled your credit report in the past two years.  Too many inquiries and your credit score can decrease; however, it is doubtful that it would decrease significantly.  A good rule of thumb is that a few inquiries can lower your credit score by five points.  For this reason, you should not make it a habit to shop around for new credit cards on a regular basis.  

When your credit score is calculated all inquiries occurring during the last 30 days are not used in the calculation.  This allows you to apply for a mortgage or auto loan with several lenders within a 30-day period so that you can compare offers and avoid having your credit score lowered.

You are not penalized when you request a copy of your own credit report.  Inquiries made by employers, landlords, service companies (telephone, water, electricity, cable) don't count either.  Inquiries remain on your credit report for only two years and then they must be removed per The Fair Credit Reporting Act.

Credit history. Older borrowers definitely have the advantage when applying for credit since they have a longer credit history.  Having a brief credit history is a disadvantage and can lower your credit score, but it is not a significant factor. If it were, few young people would have credit cards and auto loans, and this isn't the case at all.  You can overcome this by showing stability and financial responsibility -- stay at the same job for awhile, stay at the same residence for awhile, have a phone in your name, having both a checking and savings account, and pay all your bills on time.

Too many accounts or not enough accounts.  People who are constantly opening and closing credit card accounts in order to transfer balances and get a better deal might be doing more harm than good as every time a new account appears as opened or closed on their credit report their credit score increases or decreases.  If you want to transfer a credit card balance to one with a lower interest rate, that's fine, but don't do it in the year before you plan to apply for a mortgage loan as it might cause you to pay significantly more for the purchase of your home.

People might find it surprising that they can't increase their credit scores by not using credit or financing.  A big part of your FICO credit score calculation is how you've been handling credit in the past six months.  If you haven't used a credit card or made a payment to anyone in the last six months, then your credit score is going to be adversely impacted because to calculate an up to date credit score, FICO needs at least one open account that has activity reported on it within the last six months.  Of course, not using credit for a long period of time doesn't mean you won't qualify for financing.  It means that your interest rate will be higher.

Applying for a new credit card, mortgage or car loan.  Unless you don't have much of a credit history and haven't established a credit rating yet, applying for a new credit card, a mortgage or auto loan can lower your credit score by about 10 or 15 points.  If you have not used credit much or have a short credit history, applying for a new credit card, mortgage or auto loan could raise your credit score by ten or 15 points.  Never purchase a car on time in the months before applying for a car loan as it increases your debt load and lowers your credit score, causing you to pay significantly more for your house.

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