Everyone wants your number. Insurance companies, cell-phone providers, utility companies, and even landlords routinely solicit that three-digit score to find out if you’re financially responsible. Your FICO credit score can help them make that assessment, says John Ulzheimer, the president of consumer education at SmartCredit.com, a credit-monitoring site.
That FICO score, the number used by most lenders to determine your credit risk, is calculated by three national credit bureaus—Experian, TransUnion, and Equifax—that maintain your credit history. Scores range from 300 to 850, with a median of about 710, according to FICO, the company that developed credit scores.
If you don’t know your number, go to MyFico.com to request a copy (for a $20 fee). If it’s 760 or higher, relax. Most consumers in that range are generally considered reliable borrowers, says Ken Lin, the chief executive of CreditKarma.com, a free credit-management service. If your number is on the bubble or lower, you’ll need to take action. (And if you see a mistake in your report, like a supposedly missed payment that you actually made on time, contact the credit bureau and say, “I dispute the accuracy of this information, so please correct it,” suggests Ulzheimer. Then follow up with a letter requesting the same.)
Read on to learn about the moves that can wreak havoc on your score (plus a couple that won’t hurt it a bit). Although you can’t easily or quickly boost your credit score, avoiding these money-related behaviors will ultimately have a positive effect on it.
Avoid at All Costs
Making late payments repeatedly. Payment history accounts for a whopping 35 percent of your score, so “this is one of the worst things you can do creditwise,” says Lin. The more severe the delinquency, the more damage it can do to your score. Deduct: Up to 200 points for three or more missed due dates within a year.
Maxing out credit cards. Having a high debt-to-credit-utilization ratio—the percentage of available credit you’re using compared with your credit limit—damages your score. Make sure at least 90 percent of your credit is freed up at any given time. Deduct: About 100 points.
Proceed With Caution
A hard inquiry. When you apply for a credit card or a loan, the institution asks about your credit to determine your borrowing eligibility; this is called a hard inquiry. It’s fine to open one new credit card, but don’t open several within a few months, says Ulzheimer. Deduct: Up to 30 to 40 points for excessive inquiries.
Closing old cards. Since your debt-to-credit-utilization ratio is used in calculating your score, be careful about reducing the number of cards you hold, as that may lower your overall available credit. Try to keep your accounts with the largest credit limits open—unless there’s a card with an annual fee that you rarely make charges on. Deduct: About 100 points.
No Need to Fear
A soft inquiry. This is a request made by you or, say, a utility company that is not related to a lending decision, so your score won’t take a hit.
Shopping for an installment loan. If you’re in the market for a mortgage, a home-equity loan, or a car loan, FICO realizes many inquiries will be made. It will lump the requests together, as long as the banks look up your score within a 45-day period. So don’t drag out the loan search too long, or your number can be lowered, as each request will be viewed as a separate hard inquiry.