Credit scores: Playing the game
On the recent "My debt problems" thread, one of the responders posted that she didn't understand why her household's credit score was lower than expected. I clip a lot of financial articles on a regular basis, and thought this info might assist not just her, but others as well.
I've included the link to the full article also.
Raise your credit score to 740
As lenders continue to tighten credit requirements, getting a good interest rate -- or a loan at all -- requires that you understand how the scoring system works.
By Liz Pulliam Weston, MSN Money, June 23, 2010
In our post-crisis economy, good credit isn't just nice to have -- it's essential if you want to level the playing field with lenders.
Give your limits a wide berth
Pay down and spread out your debt. More than a third of your FICO score depends on how much of your available credit you're using -- your so-called credit utilization. The FICO formula likes to see big gaps between your balances (whether you pay them off each month or not) and your limits, especially on credit cards. (You're rewarded for paying down installment debt, such as mortgages and auto loans, but your scores improve much more dramatically when you pay down revolving debt such as credit cards.) In short, it's better to have small balances on several cards than a big balance on one card.
A balance is a balance. You have to worry about your credit utilization ratio even if you pay your balances in full each month. The balance that's reported to the credit bureaus is typically the one on your last statement, not the balance that's left over after you pay your bill. So if you charge $9,000 on a $10,000 card, it's going to look like you're using 90% of your limit (which is really, really bad), even though you paid off the balance in full when you got the bill.
Shoot for 10%. The less of your available credit you use, the more FICO rewards you. Keeping your credit utilization below 30% on your cards is good; getting it below 10% is even better. If you regularly use more, ask for a higher limit, spread your charges out on more than one card or make two payments every month -- one just before your monthly statement closing date to lower the balance reported to the credit bureaus and a second one just before the due date to avoid late fees.
But don't let your cards gather dust. Overloading your cards is a bad thing for your scores, but so is not using them at all. The scoring formula prefers to see accounts that are being actively used rather than sitting on a shelf. Even a little activity is better than no activity."
Here is a link that might be useful: Full article on MSN Money: Raising your credit score