Your FICO Score Could Lose 50 Points by not Following This Credit Card Strategy
Borrowing money today requires impressing an increasingly hard-to-please crowd. With creditors of all kinds more cautious than ever, you need an A+ application to land the best terms — and that means an A+ credit score, the number lenders use to judge your risk of default.
The most commonly used credit scoring system, called FICO, rates people from a very risky 300 to a pristine 850 and right now we’re in the middle of a credit score crunch: You need a 750 FICO Score or better today to have the same treatment you got with a 700 FICO Score two years ago. Two years ago a 680 FICO Score was enough to get a great car loan rate — today it’s often the minimum to qualify at all.
Lenders have been making changes that could cause your score to slip from excellent to average. Improve and protect your credit number with this strategy.
The 20% Rule
The second-biggest factor in your score is how much you owe versus how much credit has been extended to you. The part of this that’s easiest to finesse is your credit card utilization rate, or your total credit card balances compared with your total credit limits, as well as each card’s balance relative to its limit.
Example: If you’ve charged $3,000 on cards and have $30,000 in credit, your rate is 10%. For the best score today, 10% is ideal, but you can probably creep up to 20% and keep a high rating.
Unfortunately, with banks lowering credit limits and canceling unused cards, it’s harder to maintain such a low percentage. In the previous example, if your available credit is cut to $10,000, your rate shoots to 30%. That could sink your score by as much as 50 points — watch for changes and stay under 20% on each card and in total.
If your already above 20%, paying down debt is the obvious way to lower your utilization rate but another strategy is to apply for an additional credit card to increase your overall credit limit. That may cause you to lose a few points in the short term — so don’t do it if you’re about to apply for a mortgage — but it should pay off in the long run.
Keep your oldest cards in play as credit issuers these days are eagerly canceling credit cards that are not in use. Besides reducing your limit and increasing your utilization ratio, having an account closed can hurt you in another way, especially if it’s among your older ones.
Because 15% of your score rides on the length of your credit history, the longer you ably manage revolving debt, the better you look. So don’t cancel your oldest cards and don’t let them get canceled on you. Move a recurring charge to each so they stay active.
If your credit card company has already ditched you then a new card can help with your utilization rate, but there’s little you can do to help the “history” component of your credit score, except to keep other old accounts in use.
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