The 10 Commandments of Credit

The credit score is one of the most important numbers in your life—for good and for bad. This little 3-digit number can open doors for you or slam them shut right in your face. Your credit score is used for qualification not just when you apply for a credit card or a loan, but also when seeking new employment, look to rent a house or apartment, and more.

When it comes to keeping your credit score high, some factors are obvious. Few things will devastate your credit score like defaulting on bills or loans, having an outstanding debt sent to collections, filing for bankruptcy or having your home foreclosed on. Any one of these actions will torpedo your credit score and sink your financial ship straight to the bottom of the sea. It will take you years to recover from the damage.

Short of that, however, there are several important rules to follow to keep your credit score in the highest end of the range. For best results, follow the Ten Commandments of Credit below.

1. Never Pay Your Bills Late. Your payment history makes up a full 35% of your credit score. Make a payment even an hour late, and you’ll be charged a late fee. Several late payments within a short period of time may cause a credit card issuer to raise your interest rate to the penalty default rate, which can run 32.99% or higher. If your payment is more than 30 days late, your card issuer will notify the credit scoring agencies, and your credit rating takes a hit.

2. Don’t pay just the minimum. Because of the economic crisis, credit card issuers are keeping a more watchful eye on account holders than ever before. Paying just the minimum can be taken as a sign of financial distress. While it won’t hurt your credit score, it could land you on the credit card company’s list of high-risk card holders. That in turn might cause them to cut your credit limit or raise your interest rate.

3. Don’t pay at the last minute. Like paying just the minimum, paying at the very last minute may get you on the credit card company’s watch list. Pay your credit card bill at least 5-7 days in advance.

4. Don’t carry high credit card balances. The next largest component of your credit score is how much of your available credit you are currently using. This is called your credit utilization ratio, and it makes up a full 30% of your credit score. Carrying high credit card balances from month to month will cause this vital ratio to increase, in turn lowering your credit score.

5. Don’t max out your credit cards. Maxing out your credit card doesn’t just put you at risk for steep over-the-limit fees, it will shoot your credit utilization ratio through the roof. When you max out your credit card, your credit utilization is at 100%. Instead, preferably only use 30% of the credit available to you on your credit cards, and never go over a 50% utilization ratio.

6. Don’t close credit cards with outstanding balances. Closing a credit card with an outstanding balance will have the same effect as maxing out your credit card, or worse. It will cause your available credit on that card to drop to zero, while the outstanding balance will make it look like you’ve maxed out the card, again hurting that credit utilization ratio.

7. Don’t close credit cards with credit available. Your credit utilization score takes into account your outstanding debt in relation to all your available credit. So closing a credit card without a balance, even if it’s one you never use, will make your credit utilization ratio go up and your credit score down.

8. Don’t close your oldest credit cards. The longer you’ve had your credit cards, the better, because it shows that you have experience managing debt. The length of your credit history makes up 15% of your credit score. When you close an old credit card—even if you never use it—it will affect the length of your credit history and lower your credit score. If you have to close a credit card, choose one with the shortest history.

9. Don’t apply for multiple credit cards or loans. Each time you apply for a credit card or a loan, your credit report is pulled. The number of credit inquiries to your account also affects your credit score, so applying for credit cards or loans several times within a short period of time will make a dent in your credit rating.

10. Don’t have only credit card loans. The last part of your credit score is the mix of credit available to you. The assumption is that the more types of credit you have available and are managing in a responsible manner, the more financially savvy you are. Having a variety of loans, like a car loan and a mortgage, can actually work in your favor, particularly if your credit history is still recent and there isn’t much other data available about how responsibly you have used credit over the years.

Published: May 22, 2009