4 New Rules for a Healthy Credit Score 

The new rules that credit card companies must follow has changed the way you see your interest rate and minimum payment impact. Now, some of the rules that determine your credit score are changing as well.  

Many credit card companies have introduced annual or inactivity fees or made last minute adjustments to their terms just before the Credit Card Accountability, Responsibility and Disclosure Act went into effect. "Now folks have to decide -- do they want this card badly enough to pay the fee, accept the new terms, or do they close it," says Barry Paperno, from www.myfico.com. It's a question of more than just losing a credit line. Closing a credit card can have a big negative impact on one's credit score. That is, unless you do some groundwork in advance.  

With the help of the five steps below, you can improve and retain a healthy credit score. Some of these steps may at first contradict what you have heard in the past so read the whole article carefully and you will be enlightened. 

Open More Credit Cards 

Credit experts have warned people that opening new credit cards will hurt your credit score and put you at further risk of significantly increasing your debt. While this is true, there is a way to add a card and make it work in your benefit. The length of your credit history and new credit make up 15% and 10% of the FICO score (respectively) but your credit utilization makes up 30% of your score. This means that FICO pays more attention to your utilization than new credit cards. With credit companies lowering your credit limit to just above your balance; this is lowering your credit score significantly. The only way to combat this is to either pay off your credit cards or hope the credit card companies do not lower your credit limit again or to add a credit card and no use it. Generally, having four or five credit cards is better than having just one or two. See Reduce Your Debt and Credit Utilization for more information on this topic. 

Evaluate your credit cards and credit utilization and come up with a plan for the next few years. If you have two or three cards that are maxed out, applying for a new card that you do not use is a good strategy. Then wait six months before applying for the next. 

Max Out (Some of) Your Credit Cards 

A problem with some credit cards is that they do not report your credit card limit. In many cases your credit utilization will look like you are maxed out on your credit card when in fact you are not.   

When the FICO scoring system analysis your account, it will either bypass it for the purpose of calculating credit utilization, or substitute the credit limit value with that of the highest balance on record for the account. 

I the case where the FICO formulas substitute the credit limit value with that credit card highest balance, consumers keep their balance the same month to month could end up with lower scores than they deserve. To resolve this dilemma, you can max out your credit card once to set the calculated adjustment high. This will improve your credit ratio as you bring your balance down to normal and improve your credit score. Do not do this just before you plan to apply for a loan as it will momentarily reduce your FICO score. As you pay down your credit line your utilization will be better than if you had not. To determine which credit cards do not show your credit limit you should get a copy of your credit score from www.myfico.com. 

Don't Ask for a Lower APR 

People were often told to call their credit card companies and ask for lower rates. This worked well before the recession when credit cards were extending their risk and fighting for your business. Now if you call, and you have made a late payment (1 day late) or gone over your credit limit once, or even worse, one of your other credit cards has reported a late payment or you have poor credit utilization, they will most likely reduce your limit and/or increase your interest rate. You must be confident that what the credit card company sees on your credit report is spotless.  

I would suggest that you wait until you have a new card that has not been used for a few months and then call. This way your credit utilization is better and you have an option if they do decide to increase your rates. Just transfer the balance, but do not close the account.  

Closed a Card? Don't Pay It Off 

Prior to the Credit Card Act, newly applied interest rates applied to past and future purchases. NOW the new rate can only apply to new purchases. But if you decided to opt out of a credit card due to an increase in interest rates take your time paying off the card. FICO will include the credit limit on a closed card when there is still a balance. Once you get down to the last $1,000 it would make good sense to make only the minimum payments to keep the lower credit utilization, which will keep your FICO score high. Once you pay off that credit card, your FICO score will be drop unless you replaced it with another.  

Daron Vchulek
Friday March 26, 2010