Credit Card Report
Financial News Made Easy

Evon Yett, of Wilmington, thought she knew how to keep a good credit score: “Don’t overspend and pay your bills,” she said.

But when Yett, 53, checked her score a year ago when trying to buy a town house, she discovered a disappointing 547. “It’s not as high as it should be,” she says. “I don’t know why.”

Yett isn’t the only one confused.

Although most Americans know their credit score is important, a lot of people aren’t quite sure how it’s derived or how to improve it. Yett got the credit score basics right: keep debt low, pay bills on time.

But it isn’t always that simple, say credit counselors, especially when trying to repair damaged credit. In fact, some actions people take to improve their credit scores actually make things worse.

Know the score

Known as a FICO score because it is calculated using a formula devised by Minneapolis-based Fair Issac Corp., your credit score is a number between 300 and 850 that is meant to show lenders how well you manage credit. Lenders look for scores above 700 and become wary when they drop below 600.

The nation’s three credit bureaus, Equifax, Experian, and TransUnion, figure scores for about 210 million Americans based on information that more than 30,000 banks, department stores, mortgage companies, and other lenders submit every month.

“A lot of people don’t realize how important your FICO score is,” says Mary Rammel, a senior credit counselor with the Consumer Credit Counseling Service of Maryland and Delaware. Not only can it affect the interest rate you get when buying a home or car, it can also affect your auto and home insurance rates, she said. Employers may even check your credit score before they hire you, Rammel says.

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Lenders, by and large, are interested only in the score, not the numbers behind it, said Norm Magnuson, spokesman for the credit bureaus’ trade group, the Consumer Data Industry Association. “They don’t even see the credit report,” he said.

Do the math

The agencies calculate your score based on a complex formula that factors in payment history, credit history, outstanding debt, the types of credit you use and the amount of new credit. The scores do not take age, sex, race, occupation, salary, marital status or national origin into account.

The largest portion of your score — nearly 35 percent — is based on payment history. In other words, have you paid your bills regularly and on time?

This part of the score is like your personal reputation, says Fair Issac spokesman Craig Watts. “It takes years to build it and one night to trash it,” he said.

“The thing that slams scores is being delinquent — that is, 30 days late or later,” said Watts.”If you have a clean credit report and you cause a creditor to report you being 30 days late, that can drop your credit score 100 points overnight.”

The second biggest factor, making up 30 percent of the score, is how much you owe.

But that doesn’t just mean the amount of debt that you have, says Watts.

“We look at balances compared to credit limits,” says Watts. “You don’t hurt your FICO score by having a million dollars in available credit. What does hurt your FICO score is that utilization — how much of your credit do you have in play?”

In other words, a person charging $200 against a $500 credit limit (40 percent of their credit) is going to look worse than a person charging $500 against a $2,000 credit limit because the first person is using a larger percentage (40 percent versus 25 percent) of the total amount they have available. Lenders look at that margin closely: The closer you are to your limit, the more lenders will worry you’re overextending yourself and will be unable to keep paying your bills.

“Lenders like to see no more than one-third on any one credit obligation,” says Magnuson.

That doesn’t mean you should open up a bunch of accounts to improve your ratio, says Rammel, the credit counselor.

“Any time you apply for credit, there’s an inquiry that goes on your credit report,” she says. A large number of inquiries in a short amount of time will lower your score, because to creditors, it will look like you’re overextending yourself.

Watch for traps

Beyond this, credit scores can get tricky.

For example, one mistake people make is closing out credit card accounts right before applying for a loan, thinking it will help their score, says Denise Freeman, a housing counselor at the National Council on Agriculture, Life, and Labor Research Inc. in Dover. But doing that will cause a break in a person’s credit history and will temporarily lower his score, says Freeman. “Especially if it’s an account that they’ve held for many years.”

And what about someone who always pays his bills on time and never uses his cards?

That’s actually not so good, says Watts, because that person isn’t maintaining a record of timely payments on their cards. Remember payment history? People with the best scores, he says, put small charges on their cards infrequently, like every few months.

“Over time, you want your habits to be reflected in your credit report,” Watts says.

And, right before applying for a mortgage, don’t try to boost your credit score by paying that old debt that went to collection 15 years ago. It might actually lower your credit score, says Freeman.

That’s because FICO emphasizes your recent activity — especially the past 12 months. “I think that what people don’t understand is that what they do right now has the most impact on the score,” she says.

So when you finally pay off old debt, you are resurrecting old history. “It’s like a sleeping dog that has just woken up,” Freeman says. “And it’s barking now.”

Her advice: Ask the creditor not to report the date the loan was paid off. That way, it will show up on the credit report as paid but not as recent activity.

Overall, counselors say, the best thing to do is monitor your report and determine how to improve it.

Rammel’s advice: Do the research. Find out what your score is. Look at your outstanding debt and scrutinize your bill-paying habits.

“You’ve got to know your own situation. And you’ve really got to be honest with yourself,” Rammel says.
- Source: The News Journal, Feb. 5, 2007