Since my last post on “Working Toward a Better Credit Score” I have found a few more good tips to share. Most of the tips in this post are about using credit cards correctly to help build your FICO score at the three credit reporting agencies. If you know what makes up your FICO score, you can focus your credit building actions on how to best impact your own credit report.
The average American family has eight credit cards. General-purpose credit cards include Visa, Mastercard, American Express and Discover. Other types of credit cards include retailer-specific store cards, gas cards and travel rewards cards. The total of all the different credit limits and how much you owe on each one in relation to the limit is calculated into a number called your “credit utilization ratio.” A good ratio is about 7%. According to industry experts, up to 20% is OK, but over that will negatively affect your FICO score.
First tip is: Don’t apply for too much credit. Eight credit cards are more than plenty for the average household. I personally only keep two general purpose cards, two retailer cards and one gas card. Not only is every card recorded on your credit report, but every time you apply for a new card is recorded as well. If you suddenly start applying for several more credit cards, you get flagged for being “credit hungry” and can be a reason for your next application to be denied or your existing cards might increase your interest rate and minimum payment amounts. About 10% of your FICO score comes from new accounts.
On the opposite side, you don’t want to suddenly close credit card accounts. If you decide to close an account, choose one of the newer accounts and pay off the balance in full – don’t just transfer the balance to a different card. The older your account, the better. Up to 15% of your FICO score is based on:
- The length of time each account has been open.
- The length of time since each account’s last activity.
My last tip is probably the most important: pay more than the minimum amount due every month and get the balance on each credit account down to just 35% or less of the credit limit for that account. This “credit utilization” is 30% of your FICO score.