Increasing Your FICO Score:
Strategies Credit Card Users Need to Know
The laws that credit card issuers must follow transformed significantly with the passing of new regulations this year, and there have also been some changes in the rules for card holders looking to improve or maintain their FICO score.
In most cases, consumers would certainly continue to be wise to pay by the due date, keep their balances low and refrain from trying to get a lot of credit cards at the same time. However many of the older rules of thumb might not endure, as credit card issuers continue to adjust to their new climate and try to find solutions to for operating their businesses.
Here's an example: Several issuers created annual as well as inactivity fees in the months leading to as well as soon after the Credit Card Accountability, Responsibility and Disclosure Act went into effect. Consumers must now decide if having their card is worth the fee.
It's a question of more than just losing a credit line. Closing a credit card can have a big impact on your credit scores. That is, unless you do some groundwork in advance.
By practicing a few simple rules, you can strengthen or keep your credit scores looking good despite the growing turmoil and change taking place in the credit market.
1. Have more credit cards
For decades, experts have cautioned that opening new credit lines hurts your credit rating, as well as allowing you to possibly run up massive debts. This in fact remains true: The length of your credit history accounts for 15% and new credit makes up 10% of your FICO score. However, with credit issuers lowering credit limits everywhere you look nowadays, having an inadequate number of credit cards puts an infinitely more crucial credit-score ingredient in danger: credit utilization, or the amount of your available credit you have in use. Credit utilization accounts for 30% of your credit score.
Generally, having around a half dozen credit cards is preferable to having just a couple.
Broadening ones credit card portfolio is not really something best done overnight; it's a strategy to be carried out over time. If all you have is just one or two cards, it's a good time to open a new credit account. But then hold off on another for at least six months to a year before getting another one.
2. Max out (a few of) your credit cards.
An idiosyncrasy of FICO score calculation makes it beneficial to max out certain cards. Why? It's dependent on what the card issuer tells the credit bureaus.
Some varieties of credit cards don't report credit limits to the credit bureaus. They include all charge cards from American Express and some high-end credit cards which are advertised as having no predetermined spending limit, like Visa Signature and MasterCard World.
Once the FICO scoring system comes across this type of account, it will either overlook it with the aim of calculating credit utilization or replace the credit limit value with the highest balance ever on record for the account in your credit history.
If the FICO formulas does substitute the credit limit value with that of the highest balance, card holders that spend roughly the same amount on a monthly basis could end up receiving lower scores than they are worthy of. The answer: Produce a balance that's significantly greater than your normal monthly spending balance (that you can pay back the very next month to avoid credit interest rate charges). Your utilization ratio will strengthen in the following months which in turn will increase your credit scores.
Your scores will decrease through the thirty day period that your card appears maxed out, so don't try this tactic if you are in the process of looking for a home loan or any other kind loan at the time.
To determine if you have credit cards which don't purport a published credit limit, just check your credit reports. By law you are can get one free report a year from each of the three major credit bureaus.
3. Don't request a lower credit interest rate.
For many years, consumers were told they should call their credit card companies and ask for lower rates of interest.
Unfortunately, nowadays calling your credit card company to discuss having your credit interest rate decreased could actually result in an account review which could cause your rate to actually go up and your credit limit to go down if they don't like what they find. This is why having multiple credit cards is a good idea. You should only make the call to the credit card company looking for a reduction in your interest rate if you have a backup card where you can transfer that balance should things not go your way.
4. If you recently closed a card, you may not want to pay off the entire balance.
Under the previous rules, credit interest rate increases applied to both your existing balances and future purchases. Now, with the new Credit CARD Act rules in effect, lenders are actually limited to applying rate increases only to balances new balances moving forward. Thus, in the event you closed an account before the new law took effect to opt out of a rate hike, you might not be in a hurry to pay off the remaining balance. The reason: FICO counts the credit limits of closed accounts toward utilization ratios only as long as there's a balance still outstanding on the account.
A $300 balance on a closed card that had a $15,000 is great for your utilization ratio. As soon as you pay completely off the utilization will no longer count toward improving your credit score, which means your credit rating could go down a bit because you paid off the balance and there is no longer available credit being counted toward your utilization ratio.
5. Mix business and personal expenses
Prior to the passage of the Credit CARD Act, credit experts routinely encouraged business owners to prevent business and personal expenses from being put on the same credit card.
Since the CARD Act doesn't affect business credit cards, using your personal card for business expenses is safer because those accounts are protected by the law.
On the other hand, doing this can potentially harm your credit, particularly if you have really high business expenses because even in you pay off these high balances entirely every month, they'll now be listed on your personal credit report and you might be classified as overextended.