October 4th, 2011
If you’re considering purchasing a home in the future, you may be paying extra attention to your credit score. Your level of risk, which is demonstrated by your credit score, determines the interest rate you pay on your mortgage. Therefore, it’s critical to get your score as high as possible to take advantage of the best rates.
In his article “Credit score tips that don’t make sense,” Jason Steele discusses several tips that don’t seem right at first glance. FICO has a detailed equation for determining one’s score, and based on what we know about that equation (we don’t know it all), here’s some advice.
The more debt you have (that you pay on time) the higher your score. In order to have a credit score, you need credit. And the only way to establish credit is by taking on some debt. Of course, there’s good debt and bad debt. Car loans, student loans, and mortgages are considered good debt, and having variety in your debt is important. Someone with a student loan and a credit card (that aren’t delinquent) is likely to have a higher score than someone who just has a student loan.
More credit cards mean a higher score. Having more credit available to you gives you a higher score. By opening credit cards, you accrue credit. Therefore, having more credit cards can increase your score, as long as you don’t rack up the debt on the cards.
For example, someone with $1,000 in debt split between two credit cards will have a higher score than someone with $1,000 in debt on one card. Bottom line: Increase your credit capacity without increasing your debt.
Don’t cancel credit cards. Steele explains that 15 percent of your credit score is determined by the length of your credit history. Don’t cancel cards simply because you don’t use them if they don’t carry annual fees.
Shop quickly. Of course you should always do your homework when shopping around for the lowest rate – but do it fast. Repeat inquiring will be treated as one inquiry as long as they are done within 30 days.
So, for example, if you’re looking for the lowest interest rate for a credit card, you may apply for 5 cards, and then stick with the one that gives you the best offer. That won’t hurt your score if all of those cards request your credit information within that 30-day frame. Don’t apply for 2 cards, wait for the response, and then apply for 2 more when you aren’t happy with their offer.