6 Important Credit Score Moves to Make Now
By Eva Norlyk Smith, Ph.D.
October 14, 2009
In the current tight credit environment, keeping your credit score as high as possible is of critical importance. The rules for credit scores are changing. A credit score of 720 used to be considered Excellent, and would get you approved for loans and credit cards with the best terms. Nowadays, your credit score must upwards of 750 to be considered Excellent.
Even worse, with the changing credit card landscape, the rules for what it takes to keep your credit score high are also changing. It’s no longer enough to simply pay your bills on time; you have to be much more proactive to keep your credit score as high as possible. To keep your credit score in tip-top shape, here are six important credit score moves to make now.
1. Keep Track of Your Limits. Credit card companies have been cutting back credit lines like never before. They have already cut credit limits by 1.25 trillion, and some experts estimate that card issuers will scale back credit lines by another $1.5 trillion before the current pullback in credit card lending comes to an end. Card issuers don’t have to notify cardholders of credit limit cuts, so your limits could have been slashed without your noticing, particularly on cards you rarely use.
The more cards that get their limits cuts, the more your score could potentially be affected. Why? Because credit limit cuts may affect an important part of your FICO score, the so-called debt-to-credit-limit ratio. This is a measure of how much a person uses of his or her available credit, and it makes up a full 30 percent of the FICO score. When your credit limit is cut, it will affect your debt-to-credit ratio if you carry outstanding balances on your credit cards, because you will now be using a higher percentage of your available credit. This in turn could lower your credit score, depending on how much your credit limit was cut. So, keep a list of all your credit cards with their current credit limit and keep it updated every two to three months to avoid adverse effects from credit line cuts.
2. Keep balances below 30%. Many card holders have seen their limits lowered to $2,000 to $3,000. For cards with low credit limits, it’s much easier to rake up a credit balance that is high in relation to the available credit. If your card limit is $10,000 and you regularly charge, say, $1,800 to your card each month, you’re only using up 18% of the available credit. If the card limit gets lowered to, say, $2,000, however, those $1,800 in monthly charges now turns into a debt-to-credit-limit ratio of 90%. It will make it look like you’ve maxed out your credit card and will count against your credit score, even though you haven’t changed a thing.
3. Use all your credit cards. These days, when it comes to credit cards, it’s use it or lose it. Credit card companies are cutting back their risk exposure not just by slashing credit limits, but by outright closing down credit card accounts. Credit card accounts that aren’t being used at best are unprofitable for credit card companies, at worst they represent an unknown credit risk. For this reason, credit cards rarely used are the first to get targeted for limit cuts or outright account closure. To avoid this, use all your credit cards regularly and responsibly–ideally pay off the balance in full each month.
4. Be Wary of Balance Transfer Deals. Balance transfer offers at 0% APR used to be the closest you’d come to a free lunch. However, nowadays, they are not only generally more expensive to take out; they are much more risky. Firstly, it is harder to roll the balance over into another low rate card once the introductory period expires, so you could find yourself paying higher interest rates than you did on the card you made the balance transfer from. Secondly, you have to be careful not to carry a balance on any one card high enough to affect the debit-to-credit-limit ratio and hurt your credit score.
5. Don’t close old credit cards. When card issuers cut your credit limit or raise your interest rate, it’s a natural reaction to simply want to close your credit card account. However, fifteen percent of the FICO score is determined by the length your credit history. When you close old credit card accounts, it will shorten the length of your credit history, particularly if it’s a card you’ve had for many years, and this could cause your score to inch downwards.
6. Don’t apply for new credit cards willy nilly. Applying for a new credit card affects FICO scores in several ways: For each credit card application submitted, points are deducted from your FICO score. Further, by adding a new credit card, the average age of your credit history will go down, again possible detracting from your total score. Finally, most credit cards these days are issued with very low credit lines, and using these to rake up new debt could hurt your debit-to-credit-limit ratio.